Rcom de­faults on dol­lar debt in test for bank­ruptcy law

Mint ST - - FRONT PAGE - BY DENISE WEE feed­back@livemint.com HONG KONG

The first de­fault on US dol­lar bonds by an In­dian com­pany in 15 months may be­come a closely watched test case for how in­ter­na­tional cred­i­tors will fare un­der the coun­try’s new bank­ruptcy laws.

Re­liance Com­mu­ni­ca­tions Ltd (Rcom), the tele­com op­er­a­tor con­trolled by bil­lion­aire Anil Am­bani, failed to pay a coupon on its 2020 dol­lar notes be­fore the ex­piry of a grace pe­riod on Mon­day, ac­cord­ing to a per­son fa­mil­iar with the mat­ter. It’s In­dia’s most high-pro­file de­fault on in­ter­na­tional debt since the In­sol­vency and Bank­ruptcy Code was passed in May 2016. The com­pany’s shares and bonds fell to record lows.

The new bank­ruptcy rules are de­signed to speed up debt re­struc­tur­ing at a time when the bank­ing sys­tem is plagued by the high­est stressed-as­set ra­tio in 17 years. An im­proved res­o­lu­tion process would not only en­cour­age for­eign money man­agers to in­crease hold­ings of In­dian dis­tressed debt, it could also help re­duce bor­row­ing costs for com­pa­nies.

“If the re­struc­tur­ing is done prop­erly and fairly, this could set a good prece­dent and global cred­i­tors will take com­fort that debt re­struc­tur­ing can have a sat­is­fac­tory out­come in In­dia,” said Dhi­raj Ba­jaj, Sin­ga­pore­based port­fo­lio man­ager at Lom­bard Odier. “His­tor­i­cally, some debt re­struc­tur­ings have taken years and proved to be very costly for cred­i­tors from a time, cap­i­tal and op­por­tu­nity cost per­spec­tive.”

While it’s un­clear whether off­shore cred­i­tors will uti­lize the new rules, Ernst & Young (EY) says bond­hold­ers can prompt firms to come up with a debt res­o­lu­tion plan or face liq­ui­da­tion if they fail to do so af­ter 270 days. There hasn’t yet been a case where this process was ini­ti­ated by off­shore bond­hold­ers, ac­cord­ing to EY.

Un­der the old rules, “the only op­tion avail­able to bond­hold­ers was liq­ui­da­tion”, said Abizer Di­wanji, part­ner and na­tional leader, fi­nan­cial ser­vices, EY. “And that took for­ever.”

The de­faulted 2020 notes is­sued by Rcom, once the coun­try’s sec­ond­largest wire­less op­er­a­tor, were trad­ing at a record low of about 35.6 cents on the dol­lar as of 4.03pm in Hong Kong. The com­pany’s shares slid 3.3% to an all-time low of Rs11.55.

Rcom had re­it­er­ated on Satur­day that a stand­still pe­riod for in­ter­est and prin­ci­pal re­pay­ments con­tin­ues un­til De­cem­ber 2018. The com­pany has pro­posed a debt res­o­lu­tion plan to lenders that in­cludes lenders con­vert­ing part of their debt to eq­uity. A fil­ing un­der the in­sol­vency code would force the firm to come up with a debt res­o­lu­tion plan for all its cred­i­tors.

Un­der the new rules, any­one who has debt due of more than Rs1 lakh can file for tak­ing the com­pany to a cor­po­rate in­sol­vency process, ac­cord­ing to EY’S Di­wanji. The threat of bond­hold­ers tak­ing ac­tion in courts could prompt a firm to be­gin talks with bond in­vestors, ac­cord­ing to Gun­jan Shah, part­ner at law firm Shardul Amarc­hand Man­gal­das and Co.

While the prob­lems at Rcom high­light the dangers of in­vest­ing in In­dian com­pa­nies with high debt, a suc­cess­ful re­struc­tur­ing process could ul­ti­mately make the coun­try more at­trac­tive for in­vestors. “Re­cent de­faults in the In­dian off­shore dol­lar mar­ket are go­ing to be in­ter­est­ing test cases for the evolv­ing In­dian reg­u­la­tory sys­tem,” said Man­jesh Verma, Hong Kong-based head of Asia credit spe­cial­ists at Cit­i­group. BLOOMBERG

Re­liance Group com­pa­nies have sued HT Me­dia Ltd, Mint’s pub­lisher, and nine oth­ers in the Bom­bay high court over a 2 Oc­to­ber 2014 front-page story that they have dis­puted. HT Me­dia is con­test­ing the case.

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