Moody's sees RCom as vulnerable to rupee depreciation

Credit rating agency Moody’s has said that Reliance Communications (RCom), which has 66% of its total debt in US dollar, does not have sufficient cushion in place against the risks from the possibility of the rupee depreciating up to 20% from March 31 this year.

Over the last 12 months, the rupee has depreciated about 13% against the US dollar.

The global rating agency has found that six out of 49 non-financial high-yield corporates it rates in South and Southeast Asia with US dollar denominated debt, do not have such "mitigants". These 49 corporates have US dollar debt totalling $56.5 billion. Out of this RCom has $4.6 billion outstanding dollar debt.

Four out of these six exposed companies have some cushion to protect credit quality – such as low leverage or the ability to extract dividends from subsidiary. These can provide some financial cushion in the event of sustained currency depreciation.

But RCom along with Indonesia based tire maker Gajah Tunggal are the two who do not have sufficient mitigants, the report said. It cites Tata Chemcials among four companies whose US dollar debt exposure has increased to around 65% of their outstanding from 27 to 37% at end-2013. “Still, hedges provide sufficient mitigation against this increased exposure,” said Annalisa Di Chiara, vice president-senior analyst Moody’s Investor Service in her report. The other Indian companies in the same category are GCX, JSW Steel, Delhi International Airport Private Ltd, Sintex Industries, Indiabulls Real Estate and Lodha Developers.

US dollar appreciation against local currencies could also limit a company’s ability to comply with its financial covenants. Companies most at risk are those that generate revenues in local currency, report in local currency, borrow in US dollars, and have maintenance covenants that are calculated in local currency.

The depreciation of the Indian rupee against the US dollar in 2014 contributed to R Com seeking waivers related to non compliance with the maintenance of its financial covenants (i.e., maximum debt/EBITDA and minimum EBITDA/interest). “And in the absence of fund raising from asset sales, we expect the company will need additional covenant waivers in 2015, given its high debt levels. However, as R Com has been able to receive such covenant waivers historically, we expect that it will also receive the required waivers going forward,” said Chiara.

RCom has around 65% of its debt denominated in US dollars. It is exposed because it generates about 80% of its revenue in Indian rupee (which will rise to 90% if it completes a sale of GCX), while its US dollar liabilities are primarily related to debt service. RCom's high consolidated leverage of 5.2 times is at the upper tolerance range for the rating and this provides limited cushion to absorb shocks associated with currency mismatches.

“Although we expect the company to deliver towards adjusted debt/ EBITDA of 4.0 times by March 2016 (primarily through the proceeds acquired from asset sales like GCX), this delevering would likely be slower under a 20% sustained depreciation scenario,” said the report.

However, the report cites communications infrastructure company GCX which is wholly owned subsidiary of RCom as one that has sufficient mitigants against such a risk of currency depreciation.

This is because it executes the majority of its capital spending and purchase, revenue and long-term operating contracts (including marine maintenance and landing station charges) in US dollars, thereby providing a natural hedge. As a result, GCX’s exposure to local currency depreciation is small and primarily related to employees as well as selling, general and administrative expenses.