Aircel, one of the country’s oldest private sector operators, has filed for bankruptcy with the National Company Law Tribunal (NCLT). This is yet another fallout of the ongoing disruption in the Indian telecom market. Besides, it is the first such case where a company itself has come forward to start bankruptcy proceedings.
Aircel, majority owned by Malaysia-based Maxis Communications, has cited high unsustainable debt, price wars, and legal and regulatory challenges as the key reasons behind its approaching the NCLT. In a press release issued on March 1, 2018, the company said, “The board of directors acknowledged that it has been facing troubled times in a highly financially stressed industry, owing to intense competition following the disruptive entry of a new player, legal and regulatory challenges, high level of unsustainable debt and increased losses. Post detailed discussions with the financial lenders and shareholders, the company could not reach a consensus with respect to restructuring its debt and funding. Under the current circumstances, especially after the February 12, 2018 RBI [Reserve Bank of India] guidelines, the company believes that the resolution process under the Insolvency and Bankruptcy Code, 2016 is an appropriate recourse.”
The NCLT has accepted Aircel’s bankruptcy petition and an insolvency resolution professional (IRP) will soon be nominated from Aircel’s side to commence the resolution process. Once an IRP is appointed, the management will be dissolved and the resolution professional will lead the way forward for the operator.
Changing industry dynamics
In 2010, Aircel shelled out a massive amount to acquire 3G spectrum in 13 circles and broadband wireless access (BWA) spectrum in eight circles. However, the initially tepid response to 3G services in India and the underdeveloped BWA ecosystem did little good for the operator, which was looking to these services to enhance its margins in a saturating voice market. Nevertheless, Aircel continued offering innovative data plans at affordable rates in a bid to encourage higher data usage.
Meanwhile, the litigation surrounding the Aircel-Maxis deal and the company’s alleged involvement in the 2G scam had a serious impact on its operations, market position, finances and credibility. More recently, like many other players in the industry, Aircel witnessed a steep decline in its profit margins as it was forced to slash tariffs in response to Reliance Jio Infocomm Limited’s (RJIL) aggressive pricing strategies.
Most of Aircel’s debt comes from loans raised to buy spectrum, including BWA airwaves. As of early 2017, Aircel reportedly owed Rs 126.27 billion to local banks including the State Bank of India, its leading lender, while its foreign currency debt stood at about Rs 5.95 billion, and debt from offering bank guarantees and letters of credit stood at Rs 32.32 billion. Aircel has already defaulted on the payment of interest on its debt obligations worth Rs 174 billion owing to its weak liquidity position, falling revenues and dwindling cash flows for the past several months.
Failed merger attempts
In a strategic move to reduce its debt, improve competitiveness and avoid insolvency, Aircel, in September 2016, signed a binding agreement with Reliance Communications (RCOM) to create a separate entity for managing wireless operations, with each company holding 50 per stake in the merged entity and an equal representation on the board of directors and all committees. The merger was being seen as an attempt by both operators to leverage substantial benefits of scale, as well as capex and opex synergies.
However, in October 2017, the merger was called off owing to inordinate delays caused by legal and regulatory uncertainties, various interventions by other parties, policy directives affecting bank financing for telecom and changed industry dynamics. While the merger proposal had received approvals from the Securities and Exchange Board of India, the Bombay Stock Exchange and the National Stock Exchange, it faced stiff resistance from RCOM’s main lenders, including the China Development Bank, Standard Chartered Bank and HSBC. The Department of Telecommunications (DoT) had also submitted before the NCLT that the merger would need a no-objection certificate or clearance from the Supreme Court since the latter had restrained Aircel from selling and trading the 2G spectrum allotted to it in 2006.
Had the proposed merger come through, the debt pile of RCOM and Aircel would have reduced by Rs 200 billion and Rs 40 billion respectively. Moreover, the merged entity would have reportedly become one of India’s largest private sector companies, with an asset base of over Rs 650 billion and a net worth of Rs 350 billion. It would have ranked amongst the country’s top five operators in terms of customer base and revenues, holding a substantial spectrum portfolio aggregating 448 MHz across the 850 MHz, 900 MHz, 1800 MHz and 2100 MHz bands. It would have also enjoyed enhanced business continuity through an extended validity of spectrum holdings until 2033.
Last resort
In December 2017, Aircel informed the Telecom Regulatory Authority of India that it wanted to surrender its licences in the Uttar Pradesh (West), Gujarat, Maharashtra, Madhya Pradesh, Haryana and Himachal Pradesh circles, following which the company discontinued its services in these circles from January 31, 2018. Fearing a further fall in financial metrics post the closure of services in these six circles, Aircel’s lenders asked Maxis Communications to either infuse at least $1 billion into the company or move the NCLT for insolvency proceedings.
Even before the merger with RCOM was called off, Aircel had approached financial consultants to explore an independent debt restructuring option and had sought advice on whether it could use the debt recast route to cut debt and continue as a niche player in a limited number of circles. When banks finally accepted the company’s request to undertake strategic debt restructuring, the RBI scrapped loan recast schemes in February 2018 and left Aircel with no option but to file for bankruptcy under the Insolvency and Bankruptcy Code, 2016.
The road ahead for Aircel
Buffeted by intense competition and regulatory uncertainty, Aircel has become the latest casualty in the Indian telecom sector, which until few years ago was an attractive destination for foreign players. While Maxis has invested around $7 billion in Aircel over the past 12 years, it has failed to recoup any significant return. With the insolvency petition being accepted by the NCLT, the insolvency professional has 270 days to find a way to help Aircel resolve issues regarding the continuation of services, repayment of loans and payment of salaries. If the process fails, the company will be declared bankrupt and its assets liquidated to repay its lenders. All creditors of Aircel including operators, tower companies and equipment suppliers are now preparing to head to the NCLT to recover their dues from the debt-ridden operator. As per the norms, DoT’s dues will be settled first, followed by payments to bankers and employees, and then to the vendors (tower companies and other operators).
Meanwhile, as Aircel tries to resolve these issues under the NCLT, it is crucial that its operations continue optimally. As of end-December 2017, the company had around 7 per cent subscriber share (85 million), 3.7 per cent revenue market share and operated in 16 circles. In the past few weeks, many Aircel subscribers have ported out to other operators and more customers are expected to follow suit. However, the operator will continue providing services to those that remain until the end of the bankruptcy process, which may take up to a year.
In order to keep its network running, Aircel is in talks with investors for strategic financing and is negotiating with Bharti Airtel and RJIL for intra-circle roaming pacts. The operator is also reportedly in talks with a key vendor to cater to its active users and preserve the company’s value, which will be crucial for the IRP’s efforts to keep the company going. Even if the company manages to sustain its operations, it will have to devise strategies that will not only help it survive the hypercompetition in the market, but also promise growth. This can only be achieved by forging strong business partnerships to achieve financial stability.
