MUMBAI: Global ratings agency Fitch today downgraded Global Cloud Xchange (GCX), citing a variety of factors, including the woes of its parent Anil Ambani-led Reliance Communications (RCom).
GCX's issuer default rating has been downgraded to 'CCC' from the earlier 'B-', while the one on the USD 350million secured notes due 2019 has been revised down to 'B-'
from 'B+', with a recovery rating of 'RR2'.
The issuer rating is based on a 'parent and subsidiary linkage methodology' and captures the "weak legal, operational and strategic linkages with its parent", it said, acknowledging that RCom may look to sell all or part of its stake in GCX.
"GCX faces excessive refinancing risks around the USD 350 million secured notes due August 2019 due to uncertain trading conditions and fall-out from the default and break-up of its 100 per cent parent, RCom," the agency said in a note.
"We believe that timely refinancing may be a challenge without greater certainty on the future relationship with RCom and clearer trading prospects," it added.
Apart from the lack of resolution on receivables from RCom, which owes the company USD 120 million as of September 2017, deteriorating liquidity and persistent negative free cash flow are also the factors posing risks for refinancing the USD 350-million bonds.
The agency said GCX's cash balance as of December 2017 will remain below USD 40 million due to lower-than-expected indefeasible right of usage sales.
On the free cash flow front, it said the company has a negative cash flows in FY18 as it has cash flow of USD 10-15 million from operations, which cannot meet the estimated capex of USD 25 million even if it does not pay any dividend.
There will be additional cash pressure if it pays a dividend to support USD 13 million loans due at its immediate parent, Reliance Global BV, the agency said.
On the non-payment by RCom, it said GCX has an annual trading relationship worth USD 30-35 million with RCom, which in turn "faces extremely weak liquidity following its bond default in November 2017 and debt restructuring".
"GCX's management plans to acquire some of Rcom's assets to offset its receivables. But any such transaction will require approval from Rcom's joint lenders, which may prevent timely execution of a deal," the agency said.
It can be noted that under a restructuring plan, RCom had to exit its flagship wirelss business late last year and had also embarked on an asset monetisation programme to pay off or settle dues of over Rs 47,000 crore to lenders.
The 'new RCom' will focus only on the enterprise business and should have a debt of Rs 6,000 crore.
The agency said it has made certain assumptions, including a slip in revenues to single digit percentage in FY18 in its assessment.