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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
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