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MUMBAI (Reuters) - Mobile carrier Reliance Communications won breathing room after receiving a seven-month loan reprieve from lenders, but will now need to reassure investors it can accomplish two deals critical to reducing its heavy debt.
Billionaire Anil Ambani, who controls India's seventh-ranked mobile carrier by customers, said on Friday it will receive a "standstill" on debt servicing obligations until December as it works on the deals that it expects will reduce its $7 billion debt by 250 billion rupees ($3.9 billion), or by 60 percent.
The announcement sent shares in RCom, as the company is widely known, up as much as 4.6 percent on Monday, as investors now await progress on the merger of its wireless division with rival Aircel and the sale of a stake in its mobile towers business by end-September.
Failure to clinch those deals by the end of the year could see lenders force through a restructuring or convert their debt to equity under India's strategic debt restructuring (SDR) rules that can be applied to companies that default on loans.
Gaurang Shah, head investment strategist at Geojit Financial Services, said he was not convinced the debt reprieve would mark a turnaround in RCom's fortunes in a tough telecom sector increasingly controlled by bigger players.
"We're yet to see whether they'll be able to sell the tower business and what they plan to do with Aircel," he said. "Even if they're able to do these two, there is debt on their balance sheet.
"There wasn't any clarity on how they're going to revive their business," he added. "Telecom is one of the most difficult businesses in India."
Shares in RCom were trading up 1.9 percent by 0823 GMT. Bonds due 2020 were a quarter point higher at 69/72 cents on the dollar.
The share recovery comes after RCom slumped 19.8 percent last week to record lows, its worst weekly performance since October 2009, after posting its first ever annual loss and experiencing credit rating downgrades.
"This now buys a few more months of time for the planned debt reduction, but a large amount of debt will have to be supported by remaining businesses and the structural position of RCom bonds looks unfavourable," said Rick Mattila, head of market strategy at MUFG Securities in Hong Kong.
RCom is in the midst of securing approvals necessary to complete the two deals, including from lenders and the National Company Law Tribunal (NCLT), which handles corporate matters such as mergers.
The government's telecoms ministry would also need to approve its planned merger with Aircel.
Lenders are already moving to take more stringent action should the carrier fail to deliver.
A consortium led by State Bank of India agreed in principle on Friday to force through a debt restructuring under SDR guidelines if needed, said bankers with direct knowledge of the matter.
The plan will be formally approved in a month, and bankers will wait until the end of the year before deciding whether to take majority control in RCom by swapping part of their debt into equity and forcing a change in management, the bankers said. RCom has a market value of about $814 million now.
An SBI spokesman did not respond to a request for comment.
RCom said on Friday banks may exercise the right to convert debt to equity if the two transactions are not completed within the deadline.
Even if RCom accomplishes the deals, it will still be left with about 200 billion rupees of debt at a time when the sector's profits are under threat from a price war triggered by the arrival last year of Reliance Jio Infocomm Ltd, run by Anil's elder brother Mukesh Ambani.
Anil Ambani said on Friday they had options, including a deal for an undersea cable unit, to further cut debt.
($1 = 64.3475 Indian rupees)
Reporting by Devidutta Tripathy; Additional reporting by Tanvi Mehta, Swati Bhat, and Umesh Desai; Editing by Rafael Nam and Muralikumar Anantharaman