1 July 2019: Chinese lenders to Reliance Communications Ltd, including China Development Bank, Exim Bank of China and Industrial & Commercial Bank of China, are in the midst of negotiations with foreign funds to sell their loan exposures to the insolvent telecom firm, two people in the know confirmed.
The three lenders have a total exposure of over Rs 15,000 crore to RCom, undergoing insolvency proceedings. RCom owes more than Rs 49,000 crore to all its financial creditors, according to data provided by the resolution professional of the company.
The Chinese lenders have been in talks with U.S. based fund Varde Partners and other distressed asset investors such as SC Lowy Financial HK Ltd. and Bank of America Merill Lynch for the sale of these loans. Discussions were first initiated six months ago but a deal has not yet been struck, the people quoted above said.
During the initial talks, investors were negotiating a valuation of about 40-50 cents to the dollar, implying a 50-60 percent haircut for banks, said one of the people quoted above. However, the negotiations took a turn for the worse after Rcom was admitted for insolvency. Investors are now willing to offer only 15-20 cents to the dollar, leading to a much larger haircut of 80-85 percent for lenders.
Negotiations on a possible sale are continuing, the people quoted above said. CDB, Exim Bank of China, ICBC, SC Lowy and Bank of America Merrill Lynch did not respond to queries mailed on Friday. A spokesperson for Varde Partners said that the company has no comments to offer.
Why Chinese Banks Want To Exit?
RCom and its Chinese lenders have had a contentious relationship for over two years now. The loans to RCom were originally given as part of an arrangement where the telecom company would use the funds to purchase equipment from Chinese manufacturers.
In 2017, when the domestic banks were working on a restructuring proposal for the telecom company, the Chinese lenders decided that they did not want to participate.
In June that year, the domestic banks agreed to restructure RCom under the strategic debt restructuring route, since that allowed banks a standstill arrangement for 18 months. Under such a standstill arrangement, banks would not need to classify the account as a non-performing asset. The lenders would also be required to temporarily take over majority equity in the company, so that they may sell the company to a new investor.
The Chinese lenders, however, were not keen to use this route and preferred to refer the company for insolvency. By November 2017, CDB filed an insolvency petition against RCom at the Mumbai bench of the National Company Law Tribunal (NCLT).
According to the first person quoted above, the case was eventually withdrawn after domestic lenders intervened, convincing the Chinese banks that their dues would eventually be returned. BloombergQuint could not determine whether Indian lenders gave any implicit guarantee to Chinese banks.
In December 2017, RCom entered into an agreement with Mukesh Ambani’s Reliance Jio to sell its telecom assets. This gave the lenders some hope. By December 2018 however, it had become clear that the sale was not progressing as expected due to delay in regulatory clearances. RCom and Reliance Jio eventually called off the sale agreement.
According to the first person quoted above, the Chinese lenders were also closely watching the events unfolding at another stressed telecom company, Aircel Ltd, which was also undergoing insolvency proceedings. Lenders had to take a 99 percent haircut to their loan exposures in the case of Aircel. CDB had an exposure of Rs 2,700 crore to Aircel, which had to be mostly written off.
This experience has given the Chinese lenders more reason to try and exit their loan exposure to Rcom before the insolvency process is completed.
So far, the resolution professional for RCom has collated and disclosed all the claims made by financial and operational creditors to the company. The resolution professional will soon put out a request for expression of interest from interested bidders.