The Hindu Business Line : ITI's bond issue downgraded to `default'

Chennai May 24 Moving from the best credit risk to the worst in one stroke. That is the fate of ITI Ltd, a cash-strapped public sector undertaking that has seen its bond programme going from a Triple A rating (AAA) to a default rating in one go.

ITI says it contributes 50 per cent of the telecom network and offers a complete range of telecom products and solutions covering the whole spectrum of switching, transmission, access and subscriber premises equipment. Fitch Ratings has downgraded the rating of ITI's Rs 50-crore 5-year bonds programme ("I "- series) to "default" after ITI failed to pay about Rs 14 crore to investors who had exercised their put option (right to get their money at a predetermined interval - in this case, after 3 years).

This particular bond issuance was made on the strength of a guarantee from the Government, unconditional and irrevocable, based on which the rating agency gave them a Triple A rating.

Under a structured bond obligation, the rating is not contingent on the performance or the underlying credit quality but the sovereign guarantee. Under the terms of this issuance, if there was a default by the company, the guarantee has to be invoked by the Trustees, in this case, Canara Bank. This was not done.

Warning signals

There were some warning signals earlier. In September 2006, Fitch Ratings placed ITI's Rs 50-crore 'I' Series long-term bonds, rated `AAA (ind)(SO)', on Rating Watch Negative. In January 2006, Fitch downgraded the rating of the Rs 150-crore (`J' Series) long-term GoI-guaranteed bonds programme of ITI to `D (ind)(SO)', following the default by the company in repaying the principal on the due dates pursuant to the exercise of a put option to an extent of Rs 55 crore.

Fitch had warned then that it believed that the failure on the part of the trustee to enforce the structured payment mechanism and invoke the GoI-guarantee for the `J' series bonds, leading to the default in meeting its debt service obligations, could extend to the GoI-guaranteed `I' series bonds also and could lead to multiple notch downgrades.

ITI has reported a loss of Rs 412 crore on a turnover of Rs 1,776 crore in 2006-07. It is classified as a sick company as per the provisions of Sick Industrial Companies Act (SICA) 1985. What is ahead for investors who have put money in these bonds?

What can they do if they trust government guarantees? And expect trustees to invoke those guarantees.

One more default that throws up a number of questions that need answers.

More Stories on : Corporate Bonds | Credit Rating | Telecommunications

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