Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis*

Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis

“...RCom said that the proceeds from securitisation have been utilised to repay high cost rupee debt, resulting in significant interest cost savings for the company. The securitisation has been completed with Indian and foreign banks. Deliveries of intercity fibre links to Reliance Jio have already commenced. The total deliveries of 1.2 lakh kms intercity fibre under the Agreement are expected to be completed within the current financial year”¹

- Press Release, RCom

“...Reliance Jio Infocomm Ltd. and Reliance Communications Ltd. today announced the signing of a definitive agreement for sharing of RCOM’s nationwide telecom towers infrastructure. The agreement provides for joint working arrangements to configure the scope of additional towers to be built at new locations to ensure deep penetration and seamless delivery of next generation services. Reliance Jio Infocomm Ltd. and Reliance Communications Ltd. to derive major benefits from sharing of capital and operating cost.”²

– Press Release, Reliance Industries Limited.

In April 2013, Reliance Communication Ltd (RCom) completed its 1,200 crore Inter-city Fibre Agreement with Mukesh Ambani-led Reliance Jio Infocomm Ltd (RJio).³ Under the agreement, RCom had to deliver 120,000 kilometres intercity fibre links to RJio.⁴ The deal involved Indian and foreign banks acting as SPV for the securitization process.

Securitization is a procedure through which an organization/company merges its different financial assets/debts to form a consolidated financial instrument which is later issued to investors.⁵ The investors get benefit in the form of interest in return. Securitization is thus transformation of an illiquid asset into a security.⁶ There are various steps in the securitization process. The process starts with lender such as homeowner or corporation initiating loan. Then securitization structure is added. A Special Purpose Vehicle (SPV) comes into picture once the firm allocates certain assets like consumer receivables. This structure is legally protected from management. Also credit rating agencies review the securities that are to be floated for investors. The SPV issues debt, divides the benefits as well as the risks among investors (Exhibit I)....................

Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis

Synopsis

India is the second-largest telecommunications market and the third-highest number of internet users in the world. The Indian mobile sector is growing rapidly and contributes substantially to India’s GDP. Thus Telecom Service Providers (TSPs) play crucial role in Indian economy. Other industries also depend on telecom industry. There is a positive correlation between mobile penetration and GDP growth in the economy.

In order to expand, TSP bought spectrum from Govt at a very high cost. As a result, TSPs were ridden with a high financial burden and repayment of debt became the major concern. At a time when TSPs were actively searching for opportunities to repay debts, securitization was used by Reliance Communications Ltd. (RCom) to overcome the issues related to debt and interest payment.

Securitization refers to raising money by providing some collateral with lenders. In a securitization process, an illiquid asset is converted into a security against which a company can raise funds from financial institutions. The funds so raised can be used by company for its strategic use and the financial institution has the right on the cash flow of the asset.

This case study discusses securitization process of RCom with Reliance Jio Infocomm Ltd (RJio). RCom has completed securitization of proceeds under the INR1,200 crore inter-city fibre agreement signed with RJio in April 2013. The proceeds from securitization have been utilized to repay high cost rupee debt, and thereby save interest cost on such debts. The company had raised foreign debt however its value increased due to foreign exchange impact of depreciating rupee. This securitization has been completed with Indian and foreign banks. The case study will discuss strategic aspects of the company and its impact on finance. It will cover systematic and unsystematic risks of the company and use of securitization process to overcome certain issues........................