CRISIL Limited

Financing Municipalities and relevance of Credit Rating - the Indian experience

International Conference on Financing Muncipalities and Sub-National Governments, Washington

October 1, 2004

Executive Director & Chief Rating Officer, Executive Director & Chief Rating Officer,

Roopa KudvaRoopa Kudva

CRISIL Limited, IndiaCRISIL Limited, India

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Presentation flow

Introduction to CRISIL

Credit Rating : Definition

Urban Infrastructure in India – A snapshot

Benefits of Credit Rating of Urban Local bodies

CRISIL Ratings for borrowing programmes of Urban Local bodies

Credit enhancement mechanisms and illustration

Conclusion

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About CRISIL

First and the largest credit rating agency in India

4th Largest Rating Agency in the World

Affiliation with Standard & Poor’s (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

2 Water and Sewerage Service providers

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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

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CRISIL’s Rating Scale

Rating Symbol Definition

AAA Highest Safety

AA High Safety

A Adequate Safety

BBB Moderate Safety

BB Inadequate Safety

B High Risk

C Substantial Risk

D Default

Investment Grades

Speculative Grades

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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 the water supplied)

Solid waste management services need modernization

Though roads are mostly available their quality is poor

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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

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Estimates of capex on urban civic services show significant expenditure requirements

Capital Expenditure Requirement

SourceServices/Infrastructure covered by the report

Period of recommendation

Resource requirement ($ billion)

India Infrastructure Report,1996 (Rakesh MohanCommittee)

Various urban infrastructure –Capital costs as well as operational and maintenance needs 2000-2005 27

Zakaria Committee Norms(1963) updated to 1997-98

Water supply, sewerage/sewagedisposal, storm water drainage,construction of roads & paths,street lighting & electricitydistribution – operations andmaintenance.

2000-2005 16

Ministry of UrbanDevelopment and povertyAlleviation

Revenue gap for operation &maintenance requirements relatingto civic services

2000-2005 4

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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

Sources to fund urban infrastructure

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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

Growing importance of market borrowing

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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

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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

Credit Rating of Urban Local Bodies– Benefits

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CRISIL ratings for Urban Local Bodies

Corporation Name Type Form of credit enhancementAmount rated (USD mn) Ratings Outstanding

Municipal Corporation of Hyderabad Municipal corporationCash collateral and Escrow of various municipal taxes 22 AA+(so)

Ahmedabad Municipal Corporation Municipal corporationProperty Tax Escrow, Octroi Escrow 22+22+22 AA (so)

Nasik Municipal Corporation Municipal corporationProperty Tax Escrow, Octroi Escrow 22+11 AA(so)

Thane Municipal Corporation Municipal corporation Octroi Collections 22 AA (so)

Bangalore City Corporation Municipal corporationProperty tax collections + State government guarantee 27.8 A+(so)

Chennai Metro Water Supply and Sewarage Boards Service provider Escrow of water charges 11 AA (so)Hyderabad Metro Water Supply and Sewarage Boards Service provider 156 A

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CRISIL’s 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

CRISIL rating methodology for Urban Local Bodies

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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 rating through credit

enhancement mechanisms.

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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

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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

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Pool Financing

SPV 

INVESTORS

ULB 1

ULB 10Legend

Structured Bonds

Issue Proceeds

Bonds

Subscriptions

Subsequent Repayments

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Pool Financing (cont.)

Advantages

Diversification of risk

Structuring possible to enhance credit quality

Optimum use of credit enhancement

Credit enhancement by multilaterals or Government

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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

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Illustrations of credit enhanced ratings

Nashik 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)

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Illustrations of credit enhanced ratings

Chennai 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)

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Illustrations of credit enhanced ratings

A group of 116 ULBs (a pool financing case):

Size of the bond programme – USD 22 mn

Salient features of the credit enhancement

State government guarantee – 35%

Cash collateral – 35.9%

Bond would be floated by a SPV

Target Rating – A (so)

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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

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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 ULB’s systems and process

User charges would be rationalized to attain project viability

CRISIL Limited

Thank You

Contact Details:Phone: +91 (22) 5691 3001- 09

Fax: +91 (22) 5691 3000 www.crisil.com

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Annexure: CRISIL’s criteria for rating urban local bodies1. Legal & Administrative Framework

Municipal functional domain as defined by the relevant act

Decision making process

State government transfers

Tax rates & basis of assessment

Borrowing powers & ability to pledge revenues

State government & municipal linkages

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2. Economic Base of the Service Area

Population base and growth rate

Level of industrial and commercial activity

Diversity and elasticity of tax base

Per capita income levels

Prospects for widening of tax base

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3. Municipal Finances

Accounting quality Overall surplus/deficit on revenue account Profile and trends in tax and non tax revenues Property tax effort: Demand raised, rates, systems, coll. eff. Dependence on SG transfers: Stability & transparency Expenditure profile: Head wise & activity wise Capital receipts and expenditures - Trends Debt profile: Cost, tenure, coverage Future sources of revenue growth Measures to curtail revenue expenditure

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4. Existing Operations

Range of services: obligatory/discretionary functions.

Core services: Water, sewerage facilities, primary education & health, etc.

Systems in place for delivery of these services

Level and trend of past expenditure on these services.

Proposed level of service enhancement

Major projects undertaken

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5. Managerial Assessment

Linkage between financial health & initiatives taken by a proactive management.

Organizational structure

Administrative systems and procedures

Project management skills

Level of control on expenditure

Initiatives taken to enhance resources and improve collection mechanisms

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6. Project Details

Proposed projects

Project tenure and funding patterns

Debt servicing requirements due to new projects

Existing level of service & improvements envisaged