On 18th May 2019, Reliance Capital Ltd (RCL) announced their plans for monetizing its assets worth of Rs. 10,000 crores in order to reduce their more than 50% of debt in FY20.
Downgrading in the ratings
The credit rating agency, Credit Analysis & Research (CARE) revised ratings of RCL from CARE A to CARE BBB. The downgrading in the ratings happened because of default by RCL’s subsidiaries ‘Reliance Home Finance Limited’ (RHFL) and ‘Reliance Commercial Finance Limited’ (RCFL). CARE Ratings declined ratings of 3 debt instruments of RCL. The 3 debt instruments of RCL, Long-term debt, subordinated debt and market-linked debentures will remain under credit watch of CARE Ratings with developing implications. CARE Ratings will also be supervising the advancement in the disposal of group assets or investments of RCL related to a reduction in debt levels.
Key reasons for Rating Downgrading
Deterioration in credit profiles of RCL’s subsidiaries RHFL and RCFL resulted in declining RCL’s financial flexibility and lessen RCL’s ability to generate funds from the markets.
RCL’s cash and bank balance reduced from Rs.2,941 crores in March 2018 to Rs.47 crores in April 2019. The company doesn’t have any liquid investments or unutilized committed lines apart from cash and bank balance. Hence, it’s liquidity is critically dependent on the monetization of its disposal of group assets or investments.
RCL’s capital ratio registered at 47%. Standalone gross gearing stood at 1.48x and the adjusted gross gearing was recorded at 1.97x in FY19. Hence, due to delay in divestment plans, RCL couldn’t reduce its leverage during FY18 and FY19.
RCL’s plan of asset monetization
In order to reduce its debt by more than 50% in the current fiscal, RCL had made an asset monetization plan. The company is on the track of disposal of their stake in Reliance Nippon Life Asset Management Ltd. RCL has 42.88% of stakes in Reliance Nippon Life Asset Management Ltd which are worth over Rs. 5,000 crores at current market price.
RCL has also filed DRHP with Securities and Exchange Board of India (SEBI) in order monetize their stake in Reliance General Insurance Company Ltd. Draft Red Herring Prospectus (DRHP) is an offer document which is provided by the company when it is planning to raise money from the public. It includes details about business operations and financials of the company, details about its promoters, the reason for raising money, how the money will be used, risks involved with investing in the company. RCL holds a 49% stake in Reliance General Insurance Company Ltd.
Further, RCL is on the track to monetize several of its non-core investments. In order to sharply reduce its overall debt by more than 50%, the company is expecting to generate proceeds of over Rs.10,000 crores.
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