China Development Bank offers Indian banks a risky reliance

By making a bid to push Reliance Communications Ltd into bankruptcy, China Development Bank has done what Indian lenders were trying their best to avoid. But now that it's pulled the trigger, State Bank of India and other domestic creditors won't be terribly unhappy.

The Indian wireless company owes one fifth of its $7 billion debt to CDB, which organized a syndicated loan for billionaire Anil Ambani's firm in 2011. While operational creditors such as Ericsson India Pvt. Ltd and Tech Mahindra Ltd have previously approached India's National Company Law Tribunal to start insolvency proceedings against RCom, this new petition by a hefty financial creditor comes as the biggest challenge for Ambani's desire to hold on to at least a minority stake.

The fate of that plan hangs on a privately negotiated offer that involves a pledge to sell wireless spectrum, towers, fiberoptic networks and related assets for $2.6 billion, as well as real estate for $1.55 billion, and move $930 million of obligations to a shrunk, new RCom.

To that $5 billion resolution, add a proposed $1 billion debtto-equity swap in favour of creditors, plus whatever liquid assets the company might still have (RCom had roughly $215 million of cash and equivalents in March), and the insolvency looks more or less resolved. On paper, Ambani's is a zero loan writeoff plan. But then, RCom's previous attempts to deleverage by merging its cellular business with another operator and selling a stake in the towers have come to nothing. It has already shuttered its 2G and 3G consumer businesses, and skipped a coupon on a $300 million bond. At 36 cents on the dollar, the price of the defaulted security suggests scepticism about the recovery rate.

So by bringing the sword of bankruptcy closer to RCom's neck, CDB gets to negotiate a sweeter deal with Ambani, preferably one in which there's no loan-to-equity conversion. That's something Indian banks won't mind. After all, which creditor would buy a stock at Rs24.71 (about 38 cents, the price agreed on in June) when the shares currently trade at Rs13.35?

RCom says it's surprised by CDB's "untimely and premature action." The real shock, though, is that RCom is surprised: REDD Intelligence said on 6 November that CDB was scouting for advisory firms to manage the firm in bankruptcy.

All this is a just a game. By themselves, India's capital-starved creditors can't bring enough pressure to bear on RCom. The company knows how reluctant they are to make 50% provisions against secured soured loans-and 100% against unsecured duds, as required by the regulator-should they refuse to accept Ambani's restructuring plan by a December deadline. CDB, however, is a different beast. It has so much more to lose in Venezuela-and perhaps also in Pakistan, as my colleagues Nisha Gopalan and Shuli Ren have argued-that its RCom exposure is chump change in comparison. That makes the Chinese bank a credible threat, and a pal of Indian lenders. But only up to a point. If CDB pushes too hard, and RCom does slip into bankruptcy, then Indian banks' profits for this quarter will be toast.