Rating Rationale
July 21, 2020 | Mumbai
Andhra Pradesh Capital Region Development Authority
Rating continues on 'Watch Negative' 
 
Rating Action
Rs.2000 Crore Bond CRISIL A+(CE) (Continues on 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating on the Rs 2,000 crore bond of Andhra Pradesh Capital Region Development Authority (APCRDA), and guaranteed by the Government of Andhra Pradesh (GoAP) remain on 'Rating Watch with Negative Implications'.
 
The rating remains on watch because of the continued uncertainty regarding the status of the APCRDA Act given the ongoing discussion on its annulment. CRISIL will continue to monitor developments around the legal status of APCRDA and will take a rating view once there is sufficient clarity.
 
The APCRDA Act, if repealed, will reduce the strategic importance of the authority as it will lose its ability to raise revenue through land monetisation. However, the rating continues to derive strength from a well-defined payment structure, including government guarantee and sustenance of a debt service reserve account (DSRA; see annexure 1.1). CRISIL understands that, at present, the guarantee is in force and a DSRA of Rs 104 crore, equivalent to two quarters of interest obligation, is maintained in the form of fixed deposits in lien to the trustees. Any change in the payment structure will have material implications on the rating.
 
On January 29, 2020, the rating was placed on negative watch following heightened uncertainty regarding the status of the APCRDA Act. Prior to that, on September 30, 2019, the outlook was revised to 'Negative' from 'Stable' as the capital expenditure (capex) of the authority was under review. The state government had put on hold or cancelled most of the city's contracts.
 
The rating continues to reflect the strength of an unconditional and irrevocable guarantee provided by GoAP, a trustee-administered escrow and payment mechanism for the bonds, and adequate liquidity in the form of a DSRA. The state government's finances continue to remain under pressure on account of elevated deficit and indebtedness. While CRISIL is awaiting clarity on state finances, it takes comfort from the fact that budgetary allocation has been done for the debt obligation of APCRDA. These strengths are partially offset by the state's modest economic structure with a small secondary sector, average finances with high deficit and indebtedness, and extensive use of ways and means advances (WMA) limit.

Analytical Approach

For arriving at the rating, CRISIL has applied its criteria for rating instruments backed by guarantees. The rating factors in support expected from GoAP. In addition to the guarantee, the payment mechanism is protected by enhanced liquidity through the DSRA. The liquidity buffer mitigates the risk of delayed payment, if any, from the state government, and thus lowers the risk for the instrument.

Key Rating Drivers & Detailed Description
Strengths
* Presence of a guarantee from GoAP along with a strong payment structure
Issuance benefits from an unconditional and irrevocable guarantee from GoAP for both interest and principal obligation, credit enhancement provided by a well-defined T-structured guarantee trigger mechanism, adequate liquidity buffer, and independent-trustee monitoring mechanism.
 
The rating is supported by the presence of a two-quarter upfront DSRA as a liquidity cushion, which lowers the risk of any delay in receipt of payment from the state government. The authority has adhered to the T-90 structure for its bonds without utilising the DSRA since the issuance of the bonds.
 
Furthermore, GoAP has maintained that it will honour all of its guarantees on APCRDA's debt under all circumstances. Adherence to the T-structure, maintenance of a DSRA, and timely support from the state government will be key monitorables.
 
Weaknesses
* Modest economic structure of Andhra Pradesh
The state has a modest economic structure, with a lower-than-average share of the secondary sector and higher share of the primary sector in gross state domestic product (GSDP). This tilt in the economic structure has an adverse impact on the tax/GSDP ratio, as the secondary and tertiary sectors have a higher tax potential. Socio-economic and human development indicators are modest (for example, literacy rate of 67% versus national average of 74%), necessitating higher social outlays. However, the economic structure should improve given the state's industry friendliness and investment in infrastructure. Andhra Pradesh has a fairly high per capita income and rapid GSDP growth, driven by improved tertiary and primary sectors.
 
* High deficit and indebtedness with modest economic management
Revenue deficit to revenue receipts increased to 24% in fiscal 2020 (revised estimates) from 12% in fiscal 2019. Gross fiscal deficit (GFD) to GSDP is estimated to have marginally declined to 3.7% in fiscal 2020 (revised estimates) from 4.1% in fiscal 2019, and continues to be above the 3% limit as per the fiscal responsibility and budget management norms. Total debt plus guarantee to GSDP was elevated at 34.2% in fiscal 2020 (revised estimates), similar to 35.6% in fiscal 2019.
 
The spread of the Covid-19 pandemic is likely to impact overall state finances. Inflow of tax revenue (accounts for 52% of revenue receipts), including state goods and services tax, sales tax, stamps and registration duties, motor vehicle tax, will be lower on account of the nationwide lockdown. In contrast, allocations for expenditure, especially in social sectors such as health, sanitation, drinking water, and subsidised distribution of food, are expected to go up.
 
* Uncertainty regarding the status of the APCRDA act
Uncertainty regarding the status of the APCRDA Act has significantly increased given the ongoing discussions on its annulment. Repealing the act will impact the strategic importance of APCRDA and curtail its primary cash flow from land monetisation, necessitating increased government support for servicing debt. However, availability of a DSRA and liquidity amounting to 1.5 times the debt obligation being credited one quarter in advance supports the rating.
Liquidity Adequate

The rated instrument has adequate liquidity, supported by the presence of a two-quarter upfront DSRA and an amount equivalent to 1.5 times the debt obligation in the form of fixed deposits as per a defined T-structure.
 
Rating sensitivity factors
Upward factors:
* Sustained industrial growth, with improvement in socio-economic indicators
* Sustained reduction in state revenue deficit to 0.5% of GSDP
 
Downward factors:
* Non-adherence to the T-structure in maintaining 1.5 times the debt obligation and DSRA of two quarters
* Invocation of guarantee or soft call to the government for meeting the debt obligation
* Significant weakening of state finances or sustained increase in WMA utilisation

Adequacy of credit enhancement structure

The guarantee provided by the state government is unconditional, irrevocable, and covers the entire rated amount of the bonds. A trustee-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligation. The authority adheres to a T-90 structure by maintaining 1.5 times the debt obligation in the bond-servicing account and additional liquidity in the form of a DSRA for two quarters.
 
Budgetary support from the state government along with some primary cash flow from land monetisation from APCRDA are used for servicing debt. For fiscal 2021, the state government has allocated a budget of Rs 564.5 crore for the debt obligation of APCRDA, which includes interest payments of APCRDA bonds (Rs 208 crore). While primary cash flow is likely to remain low, debt obligation will be met through increased government support, which is less than 5% of the revenue receipt of GoAP.

Unsupported ratings:  CRISIL BB

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL has considered the primary cash flow that APCRDA derives from land monetisation and budgetary support from GoAP. While the primary cash flow will remain subdued, the rating is supported by the parentage of the authority. The rating remains on watch due to uncertainty regarding future cash flow from land monetisation and will be resolved once clarity emerges.

About the Authority:
APCRDA was formed under the APCRDA Act, 2014, for the planning, coordination, execution, supervision, financing, and funding of the capital region and capital city area for Andhra Pradesh.

Key Financial Indicators - Government of Andhra Pradesh reported financials
Particulars Unit 2019 (Accounts) 2018 (Accounts)
Revenue receipt Rs crore 1,14,671 1,05,062
Revenue deficit Rs crore 13,899 16,153
GFD   Rs crore 35,441 32,314
GFD/GSDP   % 4.1% 4.1%
Debt^/GSDP  % 35.6% 32.7%
RR/Interest    Times 7.5 7.6
^ including guarantees
List of covenants

The material covenants of the instruments are as follows:

  • Neither the bondholders shall have any right to exercise a put option nor the issuer shall have right to exercise the call option to redeem the bonds, in whole or in part, prior to the respective redemption date.
  • The issuer shall be entitled to borrow/raise loans or avail of financial assistance in whatever form as also issue bonds/debentures/notes/other securities in any manner with ranking as pari-passu basis.

Any other information:
Salient features of the bonds backed by the state government guarantee:

  • Non-convertible debentures will have quarterly interest and principal obligation.
  • The tenure will be 10 years. The principal will have a moratorium of five years and an equal amortising profile thereafter.
  • Upfront creation of a liquidity facility in the form of a DSRA for the next two quarterly debt obligation (in the form of cash or fixed deposit lien marked to the trustee).
  • GoAP also has an obligation, along with APCRDA, to replenish the DSRA, if used, in a time-bound manner under the terms of their guarantee.

Annexure 1.1: Transaction structure

Timelines to be followed for structured payment mechanism assuming T1 as the first payment date 
Date Particulars
T1-90 Advance crediting of the bond servicing account of 1.5 times the upcoming debt obligation1
T1-15 Trustee to monitor the adequacy of collection (interest and principal) in the bond servicing account on T1-15th day and will intimate the issuer/GoAP in case of any shortfall
T1-7 If the shortfall is not covered by the T1-7th day, the debenture trustee shall utilise funds from the DSRA account to meet the shortfall
T1 Debt servicing date, when payments are made to the investors
T1+5 If there is a continued shortfall in the DSRA account due to utilisation of funds, issuer/GoAP will restore the DSRA account within five working days
T1+10 If the issuer fails to replenish the DSRA, trustee to inform GoAP in writing regarding the shortfall in the DSRA account so that necessary arrangements can be made for the replenishment of the DSRA by the issuer or GoAP
T1+15 The DSRA to be replenished by APCRDA/GoAP
T1+30
 		 If the DSRA is not replenished to the requisite extent by the T1+30th day, the trustee shall send a soft notice to GoAP intimating that the guarantee shall be invoked if the state government fails to replenish the DSRA
T1+75
 		 The debenture trustee should independently monitor the adequacy of collection (interest and principal) in the APCRDA bond servicing account on T2-15 (that is, 15 days prior to the next debt servicing date) and intimate the issuer in case of any shortfall
T1+83
 		 If the shortfall is not covered by T2-7 day, the debenture trustee shall utilise funds from the DSRA to meet the shortfall
T1+90
 
  1. Debt servicing
  2. Trustee shall send a notice to GoAP to replenish the full DSRA of two quarters within 30 days
T1+120 Invocation of GoAP guarantee by the trustee for redemption of outstanding principal and interest
T1+130 Last date by which GoAP shall transfer requisite funds into the designated escrow account as per the notice of invocation served by the trustees.
1Standing instruction to the principal banker
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Type of instrument Date of allotment Coupon Maturity date Issue Size (Rs crore) Complexity levels Rating assigned with outlook
INE01E708016 Bond 16-Aug-18 10.32% 16-Aug-24 400 Simple CRISIL A+(CE)/Watch Negative
INE01E708024 Bond 16-Aug-18 10.32% 16-Aug-25 400 Simple CRISIL A+(CE)/Watch Negative
INE01E708032 Bond 16-Aug-18 10.32% 16-Aug-26 400 Simple CRISIL A+(CE)/Watch Negative
INE01E708040 Bond 16-Aug-18 10.32% 16-Aug-27 400 Simple CRISIL A+(CE)/Watch Negative
INE01E708057 Bond 16-Aug-18 10.32% 16-Aug-28 400 Simple CRISIL A+(CE)/Watch Negative
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  2000.00
21-07-20  		CRISIL A+(CE)/(Watch) Negative  24-04-20  CRISIL A+(CE)/Watch Negative  30-09-19  CRISIL A+(CE)/Negative  03-09-18  CRISIL A+(SO)/Stable    --  -- 
        29-01-20  CRISIL A+(CE)/Watch Negative  07-09-19  CRISIL A+(CE)/Stable  21-06-18  Provisional CRISIL A+(SO)/Stable       
All amounts are in Rs.Cr.
Links to related criteria
Criteria for rating instruments backed by guarantees
Rating Criteria for State Governments
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support

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