Regional Centre for Urban & Environmental Studies, Lucknow

Credit Rating, Municipal Bonds and

Pooled Finance for Municipal Resource Mobilisation

Madhusudan Sharma

Resource Mobilisation

• Credit Rating • Municipal Bonds• Pooled Finance

SEBI approved Credit Rating Agencies

• CRISIL Limited• Fitch Ratings India Private Ltd.

ICRA Limited• Credit Analysis & Research Ltd. (CARE)• Brickwork Ratings India Private Limited• SME Rating Agency of India Ltd. (SMERA)

Assessment factors • Legal and Administrative framework

Taxing powers, State grants, Minimum and maximum tax rates, user charges that can be levied, Borrowing powers

• Economic base of service areaPopulation base, growth rate, taxpaying capacity, Level of industrial and commercial activity,

• Municipal finances Over all surplus/deficit, Revenue receipts, tax-base, Revenue and capital expenditure, Debt

Assessment factors-2 • Existing Operations• Managerial Assessment

Systems and Procedures, Level of computerisation, Project Management Capabilities, Political Environment, Initiatives taken for enhancing resources

• Project specific issues Tenure and funding, debt servicing requirement, Revenue, Service improvement

Rating ScaleRating Symbol

Safety Rating definition for Long-Term Debt Instruments

AAA HighestSafety

Highest credit quality. Lowest expectation of default risk. Highest degree of safety regarding timely servicing of financial obligations.

AA High Safety Very high credit quality. Highdegree of safety. Very low creditrisk.

A AdequateSafety

High credit quality. Adequatedegree of safety. Low credit risk.

Rating Scale-2BBB Moderate

SafetyGood credit quality.Moderate degree of safety.Moderate credit risk.

BB ModerateRisk

Speculative, Moderate risk ofdefault.

B High Risk Highly speculative, High riskof default.

C Very HighRisk

Substantial credit risk. Veryhigh risk of default

Rating Scale-3D Default In default or are expected to

be in default soon.+ / - '+' (plus) or '-' (minus) signs

reflect comparative standingwithin the category.Credit Rating Agency’s first name as prefix to symbol –Crisil AAA, ICRA AA,SEBI Standardised Rating symbols and Definitions in 2011

Municipal Bonds• Ahmedabad first to receive Credit rating in

February 1996 • Bangalore first Municipal Corporation to issue

Bonds in 1997• Bonds issued by Ludhiana, Nashik, Indore,

Nagpur, Madurai, Visakhapatnam, Hyderabad, Chennai etc.

• Bonds - Tax Free or Taxable

Municipal Bond Issue Regulation• SEBI issued Guidelines for Municipal Bond

Issue on 15th July 2015• Municipalities can issue only Revenue bonds

serviced by revenues from one or more projects

• Eligibility criteria defined• Prescribed conditions to be complied with

before issuing bonds

Eligibility Criteria for Municipalities• Authorised to raise funds under its constitution• Accounts prepared as per NMAM or State MAM

for at least 3 preceding years• Positive net worth in 3 preceding years• No default in repayment of debt during last 365

days• No order of restraint, prohibition or debarment

by SEBI in force against the entity or its directors • Not named in the list of the wilful defaulters

published by the RBI

General Conditions • Application to one or more recognised stock

exchanges for listing of bonds and in-principle approval from the stock exchanges

• Credit rating from at least one rating agency*• Minimum investment grade rating ('BBB-' and

above)• Disclosure of unaccepted credit rating • Arrangement with depository* for

dematerialisation of the proposed bonds *SEBI registered

General Conditions-2• Bond tenure - minimum 3 years, maximum 30

years• Appoint one or more merchant bankers* • Create a separate escrow account for servicing

of bonds with earmarked revenue.• Appoint a monitoring agency to monitor the

earmarked revenue in the escrow account • In case of corporate municipal entity - appoint

a debenture trustee**SEBI registered

Pooled Finance• Huge Fund requirement for Urban

Infrastructure• Weak Financial position of small ULBs • Not able to borrow from Capital market • FIRE-D project developed SPV• Small ULBs forming a Fund-one borrowing

umbrella• Credit enhancement mechanism• Tamil Nadu and Karnataka success stories

Tamil Nadu Urban Development Fund (TNUDF) • SPV for Commercially viable water and sewerage

projects• First in India in 2003 for 14 municipalities • Rs.30 crore bond issue @ 9.20% for 15 years • Multi-layered credit enhancement mechanism • USAID under FIRE-D project guaranteed 50% principal • Escrow account to set apart monthly payments• Strong collection of user charges • Fixed upfront contribution from citizens • Funds Rs. 1500 crore, Projects worth Rs. 6000 crore• 100% debt collection over last 9 years

Karnataka Water and Sanitation Pooled Fund

• In 2005 SPV for Bangalore and surrounding 8 Municipalities

• For Greater Bangalore water supply project of Rs. 600 crore

• Rs.100 crore tax free bond issue @ 5.95% for 15 years

• USAID under FIRE-D project guaranteed 50% principal

• Escrow account to set apart monthly payments

Thanks