Rcom defaults on dollar debt in test for bankruptcy law
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
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