Detailed Rationale

CRISIL Ratings has continued its rating on the long-term debt facilities of Mahanagar Telephone Nigam Limited (MTNL) on 'Rating Watch with Negative Implications'.

 

CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) of Rs 3,668.97 crore (refer to ‘Annexure: Details of rating withdrawn’) as these have been fully redeemed and on receipt of confirmation from the debenture trustee. This rating action is in line with the withdrawal policy of CRISIL Ratings.

 

The rating was placed under negative watch following the non-adherence to the structured payment mechanism for government guaranteed bonds in the second quarter of fiscal 2025. Though the bond obligations were met on the due date, the payment mechanism was not adhered to as specified in the guarantee documents. While the structured payment mechanism specifies the account should be funded by the T-3 date by the guarantor (the Government of India [GOI]), there was a delay of 1-2 days in funding the designated account beyond the T-3 date.

 

CRISIL Ratings notes that over the past three months (from the last rating rationale dated September 11, 2024), there has been adherence to the stipulated T-structure payment mechanism as per the timeline defined in the bond documents. For the following GoI-guaranteed bonds (INE153A08147, INE153A08089, INE153A08170 and INE153A08113), the payments were made on T-3 date as per the timelines. Additionally, for the following bonds (INE153A08105, INE153A08048, INE153A08063, INE153A08071) the payments were received in T-10 days and hence no guarantee invocation was required.

 

Non-adherence to the structure poses a risk to the servicing of the bonds issued by the company. While there has been adherence to structure for the past few instances, CRISIL Ratings will continue to monitor the payments to establish the track record of adherence to the stipulated T-structure payment mechanism before resolving the watch. Instances of non-adherence to the payment strucutre mechanism in upcoming payments may lead to a downgrade of the rating. CRISIL Ratings is also awaiting clarity on issues related to non-adherence to the structured payment mechanism by the Department of Telecommunications. CRISIL Ratings continues to endeavor to contact the representatives from the Department of Telecommunications to understand their perspectives on adherence to the structured payment mechanism.

 

CRISIL Ratings has also noted that MTNL’s loan account with Bank of India (BOI; ‘CRISIL AA/Stable/CRISIL A1+’) slipped into non-performing account (NPA) category on September 4, 2024. All the escrow accounts pertaining to servicing of the GoI guaranteed bonds are maintained with BOI. CRISIL Ratings understands basis discussion with MTNL representatives as well as bankers that the operational status of the escrow accounts will not be impacted if the NPA status of the loan account continues.

 

The rating continues to be supported by the credit enhancement provided by the unconditional and irrevocable guarantee from the GoI through the Department of Telecommunications, Ministry of Communications, and the trustee-administered payment mechanism.

Analytical Approach

The rating is fully driven by the unconditional and irrevocable guarantee provided by GoI and the trustee-administered payment mechanism. The rating also factors in the government’s majority stake in MTNL.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strength:

• Credit enhancement provided by comprehensive, unconditional and irrevocable guarantee from GoI: The rating is based on the strength of the credit enhancement facility provided by the unconditional and irrevocable guarantee from GoI through the Department of Telecommunications, Ministry of Communications.

 

Weakness:

• Non adherence to the timeline of the payment T-structure mechanism: The pre-default payment T-structure mechanism between MTNL, GoI and the debenture trustee was designed to ensure adequacy of funds in the designated account much before the actual payment date (T-10 days). The payment mechanism defines multiple timelines with T-3 day as the ultimate deadline for GoI to transfer the requisite funds for majority of the bonds. Though timely payment to investors is being made (as of date), in three of the five instances of bond servicing in the second quarter of fiscal 2025, the payment framework was not adhered to as specified. In the said three instances, there was a delay of 1-2 days in funding the designated account beyond the final timeline of T-3 day stipulated in the payment mechanism. From the last rating rationale dated September 11, 2024, there have been four instances of debt servicing of GoI guaranteed bonds (INE153A08147, INE153A08089, INE153A08170 and INE153A08113), where the guarantee furnished by GoI was invoked and payments were made as per the stipulated T-structure payment mechanism. The non-adherence to the structure poses a risk to servicing of the GoI guaranteed bonds. CRISIL Ratings will continue to closely monitor the structured payment mechanism for GoI guaranteed bonds and will take the appropriate the rating action if the non-adherence persists.

Liquidity: Superior

The rated bonds and NCDs derive comfort from the liquidity based on the guarantee structure (unconditional and irrevocable guarantee from GoI through the Department of Telecommunications, Ministry of Communications), which should ensure timely servicing of debt.

Rating sensitivity factors

Downward factors:

• Non-adherence to terms of the transaction guarantee structure/payment mechanism
• Delays in receipt of funds in the designated account
• Any change in the support philosophy of the government

Adequacy of credit enhancement structure

The government has provided a comprehensive, unconditional and irrevocable guarantee for the bonds and NCDs rated by CRISIL Ratings. The guarantee shall not be transferrable to any agency without prior approval of the Ministry of Finance (budget division). The well-defined T-structure should ensure timely payment of the interest and principal obligations.

Unsupported ratings  CRISIL D

CRISIL Ratings has introduced the suffix ‘CE’ for instruments with an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India's circular dated June 13, 2019.

Key drivers for unsupported ratings

CRISIL Ratings has reaffirmed its ‘CRISIL D’ unsupported rating for MTNL owing to continuing delays in servicing debt since June 2024 due to stretched liquidity. The rating factors in the continued deterioration in the company’s operating performance and its persistent weak financial risk profile. The financial risk profile has weakened due to lasting delays in debt servicing of non-guaranteed facilities and non-adherence to the payment T-structure in instances of bond payments in the second quarter of fiscal 2025 for guaranteed debt. Furthermore, the payment obligations for GoI guaranteed bonds are being made by GoI directly for bonds due in the second and third quarters of fiscal 2025 (as on date).

 

CRISIL Ratings has taken note of the service agreement on November 22, 2024, between Bharat Sanchar Nigam Ltd (BSNL; ‘CRISIL AAA (CE)/Stable’) and MTNL for 10 years, and will continue to monitor the developments in MTNL regarding the implementation of the agreement. For arriving at the unsupported rating, CRISIL Ratings has combined the business and financial risk profiles of MTNL and its subsidiaries (refer to annexure), as these companies are in related businesses and have common promoters. The financial risk profile of MTNL remains weak because of accumulated losses, high debt and negative networth.

About the issuer

MTNL was set up by the GoI in April 1986 to improve the quality of telecommunication (telecom) services, expand the telecom network and introduce new telecom services in Delhi and Mumbai. MTNL has a large backhaul capacity of transmission cables, towers and optical fibres in the two circles. The company had 1.9 million subscribers for mobile services and 2.07 million subscribers with fixed-line telephone connections as on September 30, 2024.

Key Financial Indicators

Particulars	Unit	2024	2023
Revenue	Rs crore	799	935
Profit after tax (PAT)	Rs crore	-3268	-2915
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	NM	NM
Interest coverage	Times	NM	NM

These are CRISIL Ratings-adjusted numbers and may not match directly with the numbers reported by the company.

NM: Not meaningful as the numbers are negative

List of covenants

The material covenants of the bonds and NCDs are as follows:

• The government would only cover the principal amount and the normal interest.
• The guarantees would not be transferrable to any agency without prior approval of the budget division, Department of Economic Affairs, Ministry of Finance. In case of default, the lending agency shall invoke the guarantee within a time limit not exceeding 60 days of the default. If the guarantee is not invoked within the stipulated period, the guarantee would cease to exist for that portion of the tranche/loan/liability for which guarantee has not been invoked.
• The government guarantee shall reduce periodically equivalent to the repayment that ought to have been made by the borrower as per the terms and conditions of the loan agreement. This will be subject to the condition above.
• The trustee-monitored payment mechanism for the listed instruments are as follows:

 

Payment structure for bonds amounting to Rs 6,500 crore (to be serviced by MTNL)

Trigger date	Action point
(T-30)th day*	Trustees to inform MTNL and the government in writing regarding the due date for payment of interest or principal amount so that the necessary arrangements could be made for meeting the interest payment/principal repayment obligation on the bonds.
(T-10)th day*	The designated trust and retention account is to be funded by MTNL for the interest/principal obligation on the bonds.
(T-8)th day*	If the designated trust and retention account is not funded to the requisite extent by T-8, the trustees shall forthwith invoke the government guarantee by sending a notice of invocation to the government.
(T-3)th day*	Last date by which the government shall deposit requisite funds in the designated trust and retention account as per the notice of invocation served by the trustees.

NOTE: ‘T' refers to the due date for interest payments/principal repayment.

If any coupon payment date falls on a day that is not a business day, the payment shall be made by the issuer on the following working day, in line with Securities and Exchange Board of India (SEBI) circular number CIR/IMD/DF-1/122/2016 dated November 11, 2016.

If the redemption date (also being the last coupon payment date) of the bonds falls on a day that is not a business day, the redemption proceeds shall be paid by the issuer on the immediately preceding business day along with interest accrued on the bonds until but excluding the date of such payment.

Any other information: Not Applicable