Quick Edit | Deciphering a bond issue

Quick Edit | Deciphering a bond issue

The Ruias of the Essar Group had shown their bargaining mettle in early 2007 when Hutchison was selling its Indian telecom business to Vodafone. Essar is a partner in that firm.

The Essar Group collected a neat $375 million (Rs1,755 crore today) from Hutchison for “cooperation" in the sale of its telecom stake to Vodafone. And a put option that gave it a right to exit the joint venture at a fixed price four years after Vodafone took control.

We had then cited a study that used the Black-Scholes model to value the put option at $860 million.

The Essar Group this week used the option as collateral to raise up to $1 billion in a sale of bonds maturing in July and December 2011. Reuters cites rating agency Fitch: “...the bonds are backed by receivables under (the) put option".

One, this means that the value of the put has gone up since March 2007 and is worth at least $1 billion today.

Two, the bonds mature just when Essar can exercise its put option and exit the joint venture. Does this tell us anything?