With the telecom business unprofitable, how will lenders deal with Rcom's debt?

The merger between Anil Ambani promoted Reliance Communications (Rcom) and Aircel has been called off due to legal hurdle and regulatory uncertainties.

For brokerage analysts and corporate commentators, the failure of the deal may be catastrophic for the promoters of the companies, but in reality, it is going to be cataclysmic for the lenders.

Rcom, with a debt of over Rs 46,000 crore, looked desperate a few months ago when its stock had taken a beating after reports of loan defaults. But Ambani then had a plan to pare Rs 25,000 crore of debt by September this year. His lenders gave him a grace period of three more months, till December 2017.

All those plans have now gone for a toss. If we go by what Business Standard has reported, Rcom has proposed another plan. Now the company has offered to “reduce its debt by around Rs 28,500 crore".

Rcom will sell its tower business for Rs 11,000 crore (part of previous plan, too), the sale of fibre is expected to bring around Rs 7,500 crore and there is also hope of monetising real estate worth Rs 1,000 crore.

If things go well, the debt ridden company may also look at selling or trading its 2G and 3G spectrum. But there's a catch: the success of this plan will require 15 more months.

It would take a miracle for the Plan B to succeed. While Rcom has great assets at its disposal, there are hardly any buyers with money in the market.

Expecting an eventual conversion of debt into equity by lenders, Rcom's shareholders, have already approved issuance of equity shares to lenders by conversion of loans.

But the question is, what will the lenders do after converting debt into equity?

More trouble

In June this year, addressing the media, Ambani had made a daring statement. He had said that Rcom's management was trying to do everything to repay debt.

“Even if the lenders take over our company, they will try to sell stake to an interested buyer. We are trying to do the same. But if we fail to do it, I doubt if any lender would be able to do it.”

Over the past two years the banking sector has done everything to recover loans from corporate houses, only to realise the futility of their efforts.

The lenders don't have the ability to run companies, especially in the current business environment, and there are no takers for loss making businesses in an economy undergoing structural policy changes. Rcom reported a loss of Rs 1,221 crore in the first quarter of 2017-18.

Where does it leave the lenders of Rcom? Nowhere.

Last month, Anil Ambani warned the policy makers that the telecom sector was moving towards monopoly. The entry of Mukesh Ambani-owned Reliance Jio has initiated a war of attrition between telecom companies and the service providers are struggling to keep afloat in an era of free services for a fixed revenue.

In case the prophecy of monopoly or even oligopoly in the telecom sector by Anil Ambani comes true, it would be difficult to imagine Rcom as one of the survivors in the ongoing battle.

In present circumstances, Anil Ambani would not mind exiting the telecom business. He has taken big strides in the infrastructure and defense sectors and would want to focus his energies there. Therefore, the party in trouble at the moment is the lenders. But will they dare take over Rcom and relieve Anil Ambani from the burden of competing in an unprofitable sector?