CARE dumps ITI bonds to junk level

MUMBAI: In a rare instance, a bond guaranteed by the central government has been downgraded to junk status in a stroke. Rating agency CARE has downgraded bonds of ITI, maker of telephone and communication equipment, to Care D (SO) from Care AAA.

CARE has said the downgrade takes into account the delay in the interest payment of the aforesaid bond issue. “It may also be noted that the above default has occurred despite the bonds being backed by an unconditional and irrevocable guarantee from the department of telecommunications, the Government of India,” CARE said. The guarantee was issued on May 26, ’04, and was based on a structured payment mechanism (SPM) stipulated by CARE. The rating agency has downgraded the ‘M’ series long-term bonds.

The SPM stipulates invocation of guarantee 15 days before the due date in case of non-availability of sufficient funds in the designated account. However, the guarantee had not been invoked despite non-availability of funds in the account.

CARE had placed ‘L’ series of ITI on credit watch after there was delay by the company for the repayment of the Short Term Bond issue (’05 series) and this continues to be on the rating watch. The bond issue is backed by unconditional and irrevocable guarantee from the GoI towards payment of interest and repayment of principal for the bond issue.

CARE has said it would continuously monitor the status of debt service payments of these bond issues and would take suitable rating action(s), as and when required. The government holds 93%, while individual holding is 4.5% and others like FIIs and insurance companies hold the remaining shares.