Credit Rating - The Indian Experience

8/9/2019 Credit Rating - The Indian Experience

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Credit Rating - the Indian

experience

Submitted To: Mr.Sanjay Garg

Dept.of Finance

AUR,Jaipur

Submitted By: Krishan Sharma

MBA-Agribusiness

4th Sem



CRISIL

First and the largest credit rating agency in India

4th Largest Rating Agency in the World

Affiliation with Standard & Poors (USA)

The first to rate a state government in India Gujarat

The first municipal bond rating in Asia Ahmedabad

Credit assessment of all the major state governments and more than

100 urban local bodies in the country. This also includes:

5 municipal corporations



What is Credit Rating?

Credit Rating is an opinion on the relative degree of safety

regarding debt obligations being met on time.

It is an opinion, not a recommendation

Relative degree of safety vis-a-vis other debt instruments

Timeliness is key

Instrument-specific could be different for a structured

instrument and stand-alone

Assigned by a committee of experts in finance, management &

economics, after a detailed and in-depth discussion



CRISILs Rating Scale

Rating Symbol Definition

AAA Highest Safety

AA High Safety A Adequate Safety

BBB Moderate Safety

BB Inadequate Safety

B High RiskC Substantial Risk

D Default

Investment Grades

Speculative Grades



Current status of urban infrastructure

Current availability of urban infrastructure is inadequate:

Most of the ULBs do not meet the WHO water supply (140 LPCD) and sewerage

services norms (80% of thew

ater supplied)

Solid waste management services need modernization

Though roads are mostly available their quality is poor



Current status of urban infrastructure

Sharply growing urban population is putting pressure on already stretched urban

infrastructure

Census Year Rural

Population

(millions)

CAGR Urban Population

(millions)

CAGR Total

Population

(millions)

Rural:

Urban

1971 (actual) 439.05 109.11 548.16 80:20

1981 (actual) 523.86 1.98% 159.46 4.32% 683.32 77:23

1991 (actual) 628.69 2.05% 217.61 3.51% 846.3 74:26

2001 (actual) 741.66 1.85% 285.34 3.06% 1027.02 72:28

2011 (projected) 801.77 0.87% 377.12 3.15% 1178.89 68:32

Source: Census of India 2001 and 1991



Sources to fund urban infrastructure

Fund and non-fund based support from the state government

Capital grants

Direct project specific loans

Support to borrowing programmes through guarantee

Project specific/reform oriented assistance from the central government

Mega city scheme

City Challenge fund

National slum development programmes

Projects to be under taken in accordance with the planning commission

recommendation

Internal sources



Growing importance of market

borrowing Pressure on funding sources

Traditionally, most projects have been funded through state

government support. However, this source is declining:

Strained fiscal position, results in lowering of fund based support

Mounting guarantee levels limit the non fund based support

Abolition of octroi has impacted buoyancy in the revenues

This necessitates the use of market borrowing for funding

the urban infrastructure projects.

Credit rating is vital for market borrowing



Credit Rating of Urban Local Bodies

Benefits Use of market borrowings to bridge gap in critical infrastructure can accelerate economic

growth in the service area

Increased accessibility to funds from the capital markets

Improved visibility - facilitates flow of international capital

Potential for creation of a municipal bonds market



Credit Rating of Urban Local Bodies

Benefits

Helps benchmarking with other urban local bodies

Municipal corporations like Ahmedabad, Nashik & Thane

have used market borrowings to part fund their projects

Helps in monitoring overall debt level & finances

Provides investors an independent and unbiased evaluation

of credit quality

Helps investors in pricing the debt offer



CRISIL ratings for Urban Local Bodies

Corporation Name Type Form of redit enhancement

Amount rated

(U mn) Ratings Outstanding

Municip

l¡

¢

£ p

¢

£

ti¢

n ¢

f ¤

¥

¦

§

£

̈

¦

Municip

l c¢

£ p

¢

£

ti¢

nCash c

¢

llat

§

£

al and Esc£

¢

w

¢

f var i

¢

us municipal taxes 22 AA+(so)

Ahmedabad Municipal Cor poration Municipal cor poration

Proper t¥

Tax Escrow, Octroi

Escrow 22+22+22 AA (so)

Nasi© Municipal Cor poration Municipal cor poration

Proper t¥

Tax Escrow, Octroi

Escrow 22+ 11 AA(s o)

Thane Municipal Cor poration Municipal cor poration Octroi Collections 22 AA (so)

Bangalore Cit¥

Cor poration Municipal cor poration

Proper t¥

tax collections +

tate

government guarantee 27.8 A+(so)

Chennai Metro Water

uppl¥

and

ewarage Boards Ser vice provider Escrow of water charges 11 AA (so)Hyderabad Metro Water Supply and

Sewarage Boards Ser vice provider 156 A



CRISIL rating methodology for

Urban Local BodiesCRISILs Rating Methodology involves an in-depth assessment of the following

factors

Legal and Administrative framework

Economic base of the service area.

Municipal finances

Existing operations of the municipal body

Managerial Assessment

Project specific issues

Credit Enhancement Structure



Need for credit enhancement

Relatively low standalone credit quality of

most local bodies/water boards necessitates

credit enhancement.

Rating can be enhanced to a target ratingthrough credit enhancement mechanisms



Credit enhancement alternatives

Escrowing of dedicated revenue streams

Full guarantee from an entity with superior credit profile

Partial guarantee mechanism

Pledging of cash collateral

Partial amount guarantee

Partial tenor guarantee

Partial interest guarantee

Pool financing



Rating approach to structured Bonds

Full guarantee Rating of the guarantor

Cash Collateral Coverage of debt and stand alone rating

Partial guarantee Credit view on issuing entity and guarantor

Escrow structures / Interception grants

Separately identifiable cash flow stream

Quality and sustainability of the cash flow stream

Pool Financing

Smaller Urban local bodies aggregating to raise funds

Useful for Urban local bodies with weaker credit profile as pooling

leads to diversification of Risk



Pool Financing

SPV INVESTOR S

ULB 1

ULB 10 LegendStructured Bonds

Issue Proceeds

Bonds

Subscriptions

Subsequent Repayments



Pool Financing (cont.)

Advantages

Diversification of risk

Structuring possible to enhance credit quality

Optimum use of credit enhancement

Credit enhancement by multilaterals orGovernment



Rating approach for pool financing

Credit analysis of the pool of assets (Urban local bodies)

Cash flow analysis

Sizing credit enhancement

Payment structure analysis

Legal analysis



Illustrations of credit enhanced

ratingsNashik Municipal Corporation:

Size of the bond programme USD 22 mn

Salient features of the credit enhancement

Escrow of Octroi receivable

No lien period commence from 360 and 180 days prior to

the principal and interest payment respectively

Monthly annuity payment

Rating Assigned AA(So)



Illustrations of credit enhanced

ratingsChennai Metropolitan Water and Sewerage Board :

Size of the bond programme USD 22 mn

Salient features of the credit enhancement

Escrow of water charges receivable

No lien period commence from 360 and 180 days prior

to the principal and interest payment respectively

Monthly annuity payment

Rating Assigned AA(So)



Conclusion

Significant need for capital expenditure

Growing population has intensified the need to improve the existing

services

Limited funding support from traditional sources

Already high level of state government guarantees

The relatively low credit quality of many state governments restricts

any meaningful credit enhancement

Increasing use of market borrowing as a funding option



Conclusion

Most of the ULBs borrowing programme would

necessarily require a credit enhancement due to

their weak credit profiles

Market discipline will have a beneficial impact on

the reforming ULBs systems and process

User charges would be rationalized to attain

project viability



THANKS

Credit Rating - The Indian Experience

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