Moody's: RCOM's Ba3 Rating can Absorb Spectrum Payments

Moody's Investors Service says that Reliance Communications Limited (RCOM)'s spectrum payments totaling around INR43bn are at the high end of our expectations but can be accommodated in its Ba3 corporate family rating with a stable outlook. RCOM has renewed spectrum in only two (Madhya Pradesh and Himachal Pradesh) of the seven 900MHz circles, acquired spectrum in the 1800MHz band in another two circles (North East & Odisha), although on a cumulative basis, the company has managed to acquire 48MHz against its expiring spectrum of around 48MHz in 2015.

We expect RCOM to opt for a deferred payment schedule, which will limit its upfront cash outflow at around INR11 billion. Nonetheless, we will treat the deferred portion of the spectrum payments as debt which will keep leverage at the higher end of our tolerance for the Ba3 rating.

On 26 March, after 19 days and a record 115 rounds of bidding, India's Department of Telecommunications (DoT) announced the provisional results of the country's spectrum auctions. Results are subject to government approval and payments are expected to be made within 10 calendar days of the auction close.

According to DOT's disclosure, RCOM won spectrum of approximately 48.05MHz (26.25MHz of 800 MHz, 10MHz of 900 MHz, and 11.8MHz of 1800 MHz spectrum), as against total expiring spectrum of 48.4MHz.

"Although RCOM only renewed 10MHz of its existing 39.8MHz spectrum in the 900MHz band, it can compensate the shortfall with low-band spectrum in the 800MHz band, where the company came out winning 26.25MHz against expiring spectrum of only 5MHz, which should position it well to follow through on its business plans," says Nidhi Dhruv, a Moody's Assistant Vice President and Analyst.

Furthermore, in the five circles that RCOM will lose 900MHz spectrum, the company has similar holdings of 800MHz and 1800MHz spectrum. Moreover, the company has existing Intra Circle Roaming (ICR) agreements with other operators in these circles and network modifications are not expected to be material in nature. RCOM also remains well positioned as it secured additional spectrum in the 2010 and 2014 auctions, and the percentage of revenue it derives from its 900MHz spectrum expiring in 2015 in its three circles, where it has not acquired 2G spectrum (900/1800MHz) is only around 5%.

In our view, management has steered away from the very expensive 900MHz spectrum where premiums ranged from 80% to 200%, which demonstrates financial discipline, particularly given RCOM's high leverage. RCOM has also future-proofed its spectrum by increasing its holdings of the 800MHz spectrum by over 5.0x as this spectrum band is better suited for offering LTE services.

"Moreover, the majority of RCOM's remaining spectrum does not come up for renewal until 2021, which further limits the regulatory risks" adds Dhruv, also Moody's Lead Analyst for RCOM.

Bharti Airtel Ltd (Baa3 stable) won spectrum of approximately 112MHz for a total cost of around INR291 billion ($4.6 billion). It retained and also added contiguous 900MHz spectrum in its six renewal circles. In addition, Bharti bought 2100MHz spectrum in seven circles and increased its holding in 1800MHz spectrum.

Idea Cellular (unrated) spent the most at INR303 billion, which was tied predominantly to renewals. Vodafone India (unrated) was third having spent INR260 billion.

Reliance Jio spent INR101 billion and won 76.8MHz of spectrum (48.8MHz of 800MHz and 28MHz of 1800 MHz) which will be used to beef up its 4G LTE services planned for commercial launch at the end of 2015. Given the network sharing agreement between Reliance Jio and RCOM we expect the latter to indirectly benefit from Reliance Jio's spectrum wins as both companies will essentially ride on the same network.

Over time, it is Moody's expectation that both RCOM and Reliance Jio could further collaborate and leverage off each other's service platforms in order to broaden their product suites.

In total, the Government raised INR1.10trillion ($17.5 billion) in the spectrum auction -- about 35% higher than the reserve price.

High spectrum costs in the 900MHz band reflected aggressive bidding, particularly where incumbents, such as Bharti, focused on renewing expiring licenses in key circles to protect revenue streams and ensure continuity of business. To put this in perspective, around 40% of spectrum sold was in 900MHz band while it represented around 66% of total cost.

Upfront payments of INR11 billion will further strain RCOM's liquidity profile, in the absence of any asset sales. As at 31 December 2014, the company had cash and cash equivalents (including short term investments) of INR19 billion, against short-term debt maturities of INR70 billion. Cash flow from operations will not be sufficient to meet the company's funding needs, including capex and spectrum payments, over the next 12-18 months. RCOM will need to raise about INR50-60 billion over the next twelve months, but given the company's banking relationships we do not consider the refinancing risk to be substantial.

The principal methodology used in this rating was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

RCOM is an integrated telecommunications operator in India with presence across wireless, enterprise, broadband, tower infrastructure and DTH businesses. Through its wholly-owned subsidiary, GCX Limited, the company also provides data connectivity solutions to major telecommunications carriers and large multinational enterprises in the US, Europe, Middle East and Asia Pacific which need multi-national IP-based solutions and connectivity.

RCOM is fourth-largest mobile operator in India based on number of subscribers, which totaled 106.3 million (or approximately 11.3% of total market share by subscribers) as of 31 December 2014. As on 20 January 2015, RCOM's promoter and largest shareholder, Anil Dhirubhai Ambani, owns 59.70% of the company. Life Insurance Corporation of India (LIC) owns 6.62% and foreign institutional investors own 21.63%.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.