Detailed Rationale

CRISIL Ratings has placed its rating on the Rs 6,500 crore bonds and Rs 3,688.97 crore non-convertible debentures (NCDs) of Mahanagar Telephone Nigam Ltd (MTNL) on ‘Rating Watch with Negative Implications’

 

The rating action follows the non-adherence of structured payment mechanism for government guaranteed bonds serviced in the second quarter of fiscal 2025. Of the five instances of debt servicing of Government of India (GOI) guaranteed bonds (INE153A08154, INE153A08121, INE153A08139, INE153A08162, INE153A08188) made in the second quarter of fiscal 2025 (as of date), only two bond payments (INE153A08154 and INE153A08121) were made as per the stipulated T-structure payment mechanism. Though the remaining bond servicing obligations were met by the due date, the payment mechanism for the bonds was not adhered to as specified. While the structured payment mechanism specifies the account should be funded by the T-3 date by the guarantor (GOI), there was a delay of 1-2 days in funding of the designated account beyond the T-3 date. Ongoing non-adherence to the structure poses a risk to servicing of the bonds rated by CRISIL Ratings, which will be due for servicing from October 2024 onwards.

 

CRISIL Ratings also takes note of the uncertainity that exists regarding active operational status of company’s escrow accounts with Bank of India (BOI), as the company’s loan account with BOI has slipped into Non Performing Account (NPA) category on September 4, 2024. Earlier, Union Bank of India has imposed freezing on all bank accounts of MTNL following the classification of its corresponding loan account as NPA on August 12, 2024. Despite the funds being mobilised ahead of the due date for servicing GOI guaranteed bonds in the designated escrow accounts, freezing of the escrow accounts due to operational issues may have adverse implications on the timely servicing of the bonds as per the T-structure format.

 

Furthermore, CRISIL Ratings understands basis discussion with the company representatives as well as bankers that all the escrow accounts pertaining to the servicing of the GOI guaranteed bonds are maintained with BOI and none of the escrow accounts were frozen as on September 9, 2024. The latest interest payment made to investors from the BOI’s escrow account was on September 6, 2024, post its loan accounts slippage into NPA on September 4, 2024. However, the management has not received any written confirmation on the future operational status of the escrow account from the escrow bank if the NPA status of the loan account continues. CRISIL Ratings needs more clarity on issues related to non-adherence of structured payment mechanism by Department of Telecommunications, concerns related to freezing of bank account and plan of action to resolve the existing delays and its overall approach for managing the liquidity and financial stability. CRISIL Ratings is awaiting the company’s response on this matter and will continue to engage and follow up with the company. Also, CRISIL Ratings will endeavor to contact the representatives from the Department of Telecommunications to understand their perspectives on adherence to structured payment mechanism as well as operational aspects of escrow accounts.  

 

CRISIL Ratings will continue to closely monitor the adherence to the pre-default payment mechanism structure and operational impact of BOI’s NPA classfication of the loan account on its escrow accounts, if any, and will accordingly resolve the watch once greater clarity emerges. Continuation of non adherence to the payment strucutre mechanism in upcoming payments, any operational issues in bonds servicing along with continued uncertainty in case  no clarity received on plan for adherence to payment mechanism from management may lead to downgrade of the ratings.

 

The ratings continue 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 the government 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 the government: The rating is based on the strength of the credit enhancement facility provided by the unconditional and irrevocable guarantee from the government through the Department of Telecommunications, Ministry of Communications.

 

Weakness:

• Non adherence to the timelines of the payment T-structure mechanism: The pre-default payment T-structure mechanism between MTNL, GOI and debenture trustee was designed to ensure adequacy of funds in the designated account much before the actual payment date (T-10 days) and 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 made 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 to 2 days in funding of the designated account beyond the final timeline of T-3 day stipulated in the payment mechanism. The ongoing nonadherence to the structure poses a risk to servicing of the CRISIL rated bonds which will be due for servicing from October 2024 onwards. CRISIL Ratings will continue to closely monitor the structured payment mechanism for GOI guaranteed bonds and if non-adherence persists, rating actions will be taken as deemed appropriate.

Liquidity: Superior

The rated bonds and NCDs derive comfort from the liquidity based on the guarantee structure (unconditional and irrevocable guarantee from the government 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
• Change in functional status of the escrow accounts from active to inactive/frozen resulting in a hindrance to the escrow mechanism process
• Delays in receipt of funds in the designated account
• Any change in the support philosophy of the government

Adequacy of the 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 rating: ‘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 operating performance of the company and sustenance of weak financial risk profile. The overall 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 latest instances of bond payments made for guaranteed debt as per the agreed payment mechanism. Further, the payment obligations for GOI guaranteed bonds are being serviced by GOI directly for all the bonds which were due in the second quarter of fiscal 2025 (as on date).

 

CRISIL Ratings is aware of MTNL’s board approval for service agreement between BSNL and MTNL and will continue to monitor the developments given that the service agreement awaits regulatory approvals. 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 the company remains weak because of accumulated losses, high debt  and negative networth.

About the issuer:

MTNL was set up by the Government of India 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 2.14 million subscribers for mobile services and 2.29 million subscribers with fixed-line telephone connections as on April 30, 2023.

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 since 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. In case 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 NCDs amounting to Rs 3,668.97 crore (to be serviced by the government)

Trigger date	Action point
(T-30)th day*	Trustees to inform MTNL and the government in writing regarding the due date of the payment of interest or principal amount so that the necessary arrangements could be made for meeting the interest payment / repayment of obligation on the instrument.
(T-10)th day*	The designated trust and retention account is to be funded by the government to the amount of 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)th day as above, the trustees shall forthwith invoke the government guarantee by sending a notice of invocation to the government.
(T-1)th day*	Last date by which the government deposits requisite funds in the designated trust and retention account as per the notice of invocation.

NOTE: “T” refers to the due date for interest payments/ principal repayments.

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 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.

 

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-8th day, 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 repayments.

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