An Ambani Default Won't Fly

(Bloomberg Gadfly) -- Balance-sheet turbulence at large Indian companies is nothing new. The $180 billion of stressed assets in the banking system are mainly due to about 60 big corporate accounts. Yet two things make this week's meltdown in the shares and debentures of Reliance Communications Ltd. an unusual cautionary tale.

Banks and bondholders are sitting on a combined $7 billion exposure to RCom, which is confidently reiterating plans to spin off two of its main businesses to pay down 55 percent of its debt by Sept. 30. Credit rating companies, though, are wondering how RCom can service the remainder of its borrowings once it has sold its wireless and tower units, the source of the bulk of operating income.

Moody's Investors Service on Tuesday cut RCom's ratings by two notches to Caa1, four levels above default, and said it may lower them again. RCom has "no scope" to shed its debt burden of 9 times Ebitda "absent the successful execution of its corporate restructuring," it said. That's back to waiting for Sept. 30.

RCom's short- and long-term debt was also downgraded to default by local ratings companies Care Ratings and ICRA Ltd. on Tuesday, with the former saying in a statement the move takes into account delays by RCom in servicing its obligations as a result of "significant stress on its cash flows and high level of debt."

The saga of distress is curious because, first, RCom is controlled by Anil Ambani, the once-estranged younger brother of India's richest man. It's a business that Mukesh Ambani, the oil billionaire, once nurtured, only reluctantly giving it to his sibling as part of a family settlement.

The older brother may not have much interest in the undersea cable and optic-fiber business that will remain with RCom. He has his own shiny new toy now. (More on that later.) Yet a default won't exactly be a joyride for Mukesh Ambani.

RCom, after all, still uses the Reliance name. That brand, which was behind the first 100-year dollar bond issue from India two decades ago, can't afford to lose the market's trust. Institutional investors aren't the problem, but clients of a private bank in Singapore or London aren't very likely to know -- or care about -- the finer details of which Ambani brother owns what part of the empire.

Maintaining face will be important locally, too. The only homegrown Reliance company known to have forced haircuts on creditors is an unlisted gas transportation unit the group sold some years prior to Mukesh Ambani. It was essentially his private venture seeking an extension of debt maturities; and even that didn't go unnoticed.

Besides, that was before beer tycoon Vijay Mallya checked out of India last year leaving behind a failed airline and owing $1.4 billion. The outcry that caused means the country's rich will find it increasingly hard to walk away from corporate liabilities.

Secondly, RCom is a warning sign that India's soured debt malaise is spreading beyond infrastructure, power and steel. News the company may have already missed payments to banks and become a so-called special mention account, the first step to being declared a bad loan, comes less than two months after India's central bank warned lenders about their telecom advances.

Ironically, it's Mukesh Ambani who's driving the shake-up with his new fourth-generation wireless service, Reliance Jio. Free voice calls and discounted data charges are squeezing profits at larger rivals such as Bharti Airtel Ltd., and causing losses at smaller ones.  

At $115 billion, telecom debt in India is a big number for a banking system whose stressed assets exceed its net worth. Letting a hefty chunk of this go sour could unleash chaos. Jio's aggressive launch has already led to a hissy exchange between the government and the regulator. Mukesh Ambani wants market share, but not front-page news about how he's bankrupting the industry.

A smartphone revolution, driven by cheap data, would benefit the entire Indian economy. But if that throws off balance even the younger Ambani, who a few months ago was effusive about the "virtual merger" with Jio -- a sharing arrangement for spectrum, network and towers -- then it'll be a Pyrrhic victory for Mukesh.

An Ambani default won't fly. The main goal then will be to avoid it at all costs without putting Mukesh Ambani's flagship, Reliance Industries Ltd., anywhere in this not-so-pretty picture. How the two brothers pull that off will be interesting to watch.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To contact the author of this story: Andy Mukherjee in Singapore at amukherjee@bloomberg.net.