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 & 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
 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
CRISIL’s Rating Scale
Rating Sym bol Definition
Investm ent Grades
AAA Highest Safety
AA High Safety
A Adequate Safety
BBB Moderate Safety
Speculative Grades
BB Inadequate Safety
B High Risk
C Substantial Risk
D Default
 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

Current status of urban infrastructure
Sharply growing urban population is putting pressure on already stretched urban infrastructure

Census Year Rural CAGR Urban Population CAGR Total Rural:

Population (millions) Population Urban
(millions) (millions)
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

Amount rated
Corporation Name Type Form of credit enhancement (USD mn) Ratings Outstanding
Cash collateral and Escrow of
Municipal Corporation of Hyderabad Municipal corporation various municipal taxes 22 AA+(so)
Property Tax Escrow, Octroi
Ahmedabad Municipal Corporation Municipal corporation Escrow 22+22+22 AA (so)
Property Tax Escrow, Octroi
Nasik Municipal Corporation Municipal corporation Escrow 22+11 AA(so)

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

Property tax collections + State
Bangalore City Corporation Municipal corporation 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
 CRISIL rating methodology for
Urban Local Bodies
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
 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
 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

ULB 1

 
INVESTORS
SPV

Legend
ULB 10 Structured 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 or Government

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 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)
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)
 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 ULB’s systems and process

User charges would be rationalized to attain project

viability
THANKS