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Reliance Communications: On the Brink of...

Varma, Jayanth R, ...

Case

Reliance Communications: On the Brink of Bankruptcy

Varma, Jayanth R; Virmani, Vineet

IIMA-FA0560 | Published July 13, 2021 | 15 pages Case

Collection: Indian Institute of Management, Ahmedabad

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Learning Objectives

The case describes the change in fortune of Reliance Communications (RCom) from being a pioneer in offering low-cost mobile telephony to the brink of bankruptcy. After giving a brief background on the family history of Reliance Industries, its break-up and the launch of RCom, it describes the changing dynamics of the Indian telecommunications industry after the launch of Reliance Jio and the difficulties faced by RCom. As RCom's debt troubles increased, while its stock price and its credit rating plunged, yields on its Indian Rupee bonds barely moved. The case allows for discussing ways of implementing capital structure arbitrage in such situations and analyze issues that arise in doing so. The case provides data on yields on RCom's Indian Rupee and US dollar bonds over time and provides additional relevant financial information about RCom, including its market share, stock price, credit rating and balance sheet variables. The case would be appropriate for use in an advanced corporate finance or a strategic risk management or a trading strategies course.

Trading strategies afforded by discrepancy in response of equity and bond markets when a company is on the brink of bankruptcy. Understand arbitrage trades between bonds traded in different currencies. Understand and analyze scenarios in which arbitrage trades may be profitable or loss-making (`what can go wrong'). Illustrate the use of Merton model in practice for capital structure arbitrage.