Kerala Infrastructure Investment Fund Board

'CRISIL A+ (CE) /Negative' Converted from Provisional Rating to Final Rating for Rs.1200 crore Long-term loan

Rating Action

Total Bank Loan Facilities Rated	Rs.10000 Crore
Long Term Rating^	Provisional CRISIL A+ (CE) /Negative (Reaffirmed)
Long Term Rating	CRISIL A+ (CE) /Negative (Reaffirmed)
Long Term Rating	CRISIL A+ (CE) /Negative (Converted from Provisional Rating to Final Rating)

1 crore = 10 million   

Refer to annexure for Details of Instruments & Bank Facilities

^ A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015 directive ‘Standardizing the term, rating symbol, and manner of disclosure with regards to conditional/ provisional/ in-principle ratings assigned by credit rating agencies' by Securities and Exchange Board of India (SEBI) and April 27, 2021 circular ‘Standardizing and Strengthening Policies on Provisional Rating by Credit Rating Agencies (CRAs) for Debt Instruments’ respectively by SEBI.

Detailed Rationale

CRISIL Ratings has converted its provisional rating assigned to Rs 1,200 crore proposed long term bank loan of Kerala Infrastructure Investment Fund Board (KIIFB) to final rating of ‘CRISIL A+(CE)/Negative’. It has also reaffirmed its ‘CRISIL A+(CE)/Negative’ rating on the existing Rs 5,950 crore long-term bank facility and its ‘Provisional CRISIL A+(CE)/Negative’ rating on the proposed long-term bank facility of Rs 2,850 crore.

 

The rating is converted into final from provisional upon receipt of the final executed guarantee deed and term loan agreement for Rs 1,200 crore of term loan facilities with a well-defined T+29 payment structure and a guarantee invocation mechanism. These executed documents are in line with expectation based on which the provisional rating was assigned. Hence, CRISIL Ratings has converted the provisional rating to a final rating.

 

The remaining bank facilities of Rs 2,850 crore is expected to carry the same payment structure. Ratings on these facilities remain provisional and will be converted into final upon receipt of the final documentation.

 

The rating continues to reflect the unconditional and irrevocable guarantee provided by the Government of Kerala, the escrow and payment mechanism, and adequate liquidity of two quarters in the form of a debt service reserve account (DSRA) and the KIIFB corpus. The rating also factors in the regular and timely allocation of motor vehicle tax (MVT) along with petroleum cess for debt servicing. The rating is supported by the state's strong socio-economic indicators.

 

On September 15, 2020, the outlook on the rating was revised to ‘Negative’ due to expected strain on the financial risk profile of the Kerala government over the medium term on account of pandemic-induced disruptions and the resultant decline in economic activity. This was expected to increase revenue deficit (RD) and indebtedness[1] for the state. While recovery in tax collections in fiscal 2022 is likely to be supported by revival of economic activities and stable expenditure, any delay in recovery may result in sustained elevated deficit and indebtedness, leading to a rating downgrade.

[1] Ratio of total debt and guarantees to gross state domestic product (GSDP)

Analytical Approach

CRISIL Ratings has applied its criteria for rating instruments backed by guarantees. In addition to the state guarantee, the payment mechanism provides liquidity cushion through DSRA, the KIIFB corpus and escrow arrangement of MVT and petroleum cess under the Kerala Infrastructure Investment Fund (KIIF) Act. The liquidity buffer mitigates the risk of delayed payment, if any, from the state government, thus lowering the risk for the instrument.

Key Rating Drivers & Detailed Description

Strengths:

• Robust cash flow defined under the amended KIIF Act

The primary cash flow for meeting debt obligation of KIIFB is through MVT and petroleum cess allocation under the KIIF Act. The MVT and petroleum cess collected by the state government in the previous fiscal are transferred to KIIFB on a daily basis in proportion, as highlighted in the KIIF Act, such that the required allocation is transferred to KIIFB in the first nine months of the fiscal.

 

For MVT, there is a progressive step-up in terms of allocation to KIIFB from 10% in the first year (2016) to 50% in the fifth (2020), with equal increments in the interim; the allocation will remain 50% thereafter. For any shortfall in the primary cash flow, the structure draws support from the statutory obligation of the government to cover the shortfall under the KIIF Act 2016. KIIFB received MVT and petroleum cess of Rs 2,200 crore in fiscal 2020, Rs 2,173 crore in 2021. For fiscal 2022, KIIFB has already received Rs 2,297 crore as of March 14, 2022 and expects to receive Rs 2,390 crore for the full fiscal; which includes additional 10% funds in the current fiscal on last fiscal’s transfer from the state government as partial compensation for lower collections on account of the pandemic.

 

• Strong internal control mechanism providing protection from administrative delay

The Government of Kerala has set up a robust internal control mechanism exercised by the Fund Trustee and Advisory Commission. The committee has professionals from the Reserve Bank of India and various other financial institutions, thereby instilling financial discipline for servicing debt. KIIFB maintains surplus liquidity of Rs 2,820 crore as corpus and had cash and equivalent of Rs 3,391 crore as on March 14, 2022. Though cash may reduce as disbursements pick up, KIIFB keeps a minimum liquidity buffer of six months of project payments and debt obligation as a practice. Adequate liquidity buffer and along with the internal oversight mechanism, should provide the required protection from any administrative delay in receiving funds from the state government for servicing debt.

 

• Strategic importance to the Government of Kerala for infrastructure development

For long, Kerala has focused on developing human capital, having chosen to trade off physical capital in the bargain. The state government is now focused on hard capital development. KIIFB remains critical to it as an off-balance sheet vehicle, with an assured source of revenue (duly ring-fenced) and being in charge of implementing significant infrastructure plans. The government is looking to finance capital outlay even while squeezing revenue deficit through KIIFB's mechanism. Hence, the government revived KIIFB in 2016 to act as an infrastructure financing arm. The board had approved projects worth Rs 70,762 crore and made disbursements of around Rs 17,600 crore as of 23rd March 2022. The organisation is headed by the political and bureaucratic leadership of the state.

 

• Strong socio-economic parameters

Kerala has invested significantly in building its human capital through enhanced social sector spends, which is the highest among peers. The continued outlays have had healthy outcomes, and Kerala remains the top state in human development indices. The state has high literacy, life expectancy and per capita income. The high indices afford flexibility to reduce related expenses to create additional fiscal space, if required.

 

Weaknesses:

• Small secondary sector of the state, consistent revenue deficit and high dependence on remittances

The share of the secondary sector in Kerala's GSDP is low, partly weakened by modest industry friendliness; as reflected in the lower-than-average score on the ease of doing business index. The state has had consistent revenue deficit for the past few fiscals, primarily because of a modest share in central taxes, low own-tax and non-tax revenue and large committed expenditure base (61% of revenue expenditure on average) under salaries, pensions and interest.

 

Due to weak economic activity, the own tax collections of the state remained lower by 5% in fiscal 2021[1] compared with the previous fiscal. Kerala’s share in central taxes also declined because of lower tax collection by the Centre and fall in the state’s share in the central tax pool to 1.943% (based on the 15th Finance Commission recommendation) from 2.5%. Between fiscals 2022 and 2026, the state’s share in central tax pool will be 1.925%. However, overall revenue increased 7% in 2021 mainly due to support from the Centre in the form of revenue deficit grants based on the 15th Finance Commission recommendation. Expenditure increased 14.5% during the same period. The RD/GSDP widened to 2.8% in fiscal 2021 from 1.7% in 2020 due to higher expenditure and subdued revenue collections owing to low economic activity amid the pandemic.

 

The central government provided a loan of Rs 5,766 crore to Kerala in fiscal 2021 to compensate for the lower GST (goods and services tax) collections, which has helped the state fund expenses. Also, the interest and principal obligations on this loan will be met by the Centre from future cess collections. The central government is also providing similar support to compensate for the lower GST collections in fiscal 2022 with total loan of Rs 1.59 lakh crore to all states (Rs 1.1 lakh crore in fiscal 2021); this should partly support the funding requirements of Kerala. The state is also expected to receive higher revenue deficit grants (Rs 19,891 crore) in fiscal 2022.

 

While RD/GSDP is expected to recover to 1.5-2.0% in fiscals 2022 and 2023, any delay in recovery in cash flow will cause the deficit to be higher and hence will be a key rating sensitivity factor.

 

• High indebtedness with modest economic management

Total debt plus guarantee to GSDP ratio at 40% in fiscal 2021 increased from 34.6% in 2020, mainly due to lower GSDP growth and higher borrowings to fund revenue deficits and capital outlays. The state also continues to rely on ways and means advances, special drawing facility and overdraft facility extended by the RBI, thereby indicating modest economic management.

[1] Source: Provisionals from CAG

Liquidity: Adequate

Liquidity is supported by daily escrow of MVT and petroleum cess, which will be prioritised for debt servicing. KIIFB maintains surplus liquidity of Rs 2,820 crore as corpus and had cash and equivalent of Rs 3,391 crore as on March 14, 2022. Net cash inflow from MVT and cess collections will be adequate to meet debt obligation in fiscal 2022.

Outlook: Negative

KIIFB will continue to benefit from its strong payment structure and support from the Kerala government. However, there is a likelihood of strain on state finances over the medium term on account of the pandemic, which may widen revenue deficit and indebtedness in fiscal 2022 if cash flow recovery is delayed.

Rating Sensitivity factors

Upward factors

• Sustained reduction in state government revenue deficit to below 0.5% of GSDP
• Steady decline in indebtedness (including guarantees) to below 30% of GSDP

 

Downward factors

• Narrowing of credit buffer or non-adherence to the payment structure
• Sustained increase in revenue deficit to above 2.3% of GSDP

Adequacy of credit enhancement structure

The guarantee provided by the Government of Kerala is unconditional and irrevocable and covers the entire rated amount for bank loans with the presence of DSRA of two quarters. For the proposed bank loan facility, KIIFB will likely adhere to a similar payment structure. It has a robust cash flow defined under the KIIF Act, which is adequate to cover the interest and principal payments and operational expenses.

Unsupported ratings: CRISIL BBB

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit credit enhancement feature in compliance with a SEBI circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the standalone business and financial risk profiles of KIIFB. Business risk profile factors in the strategic importance of KIIFB to the state to boost infrastructure development. The board has a robust cash flow defined under the KIIF Act, which is adequate to cover the interest and principal payments and operational expenses. Furthermore, it maintains adequate liquidity in the form of cash and bank balance and DSRA of two quarters. The rating is, however, constrained by the weak finances of Kerala, driven by consistently high deficit and indebtedness.

Additional disclosures for the provisional rating

CRISIL Ratings is yet to receive the following documents and understands from the issuer that the same are in the process being shared shortly.

 

• Executed guarantee deed
• Term loan agreement

 

The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed within 90 days from the date of issuance of the instrument.

 

The final rating assigned post conversion shall be consistent with the available documents. In case of non-receipt of the duly executed transaction documents within the above-mentioned timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days in line with its policy on provisional ratings.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL BBB’

Risks associated with the provisional rating:

The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

About the Organisation

KIIFB was formed on November 11, 1999, under the KIIF Act, 1999 (Act 4 of 2000), to manage the Kerala Infrastructure Investment Fund. The purpose of the fund was to provide investment for infrastructure projects in Kerala. The enabling Act and Scheme were amended in August 2016 to mobilise funds for infrastructure development in Kerala. KIIFB is headed by the political and bureaucratic leadership of the state.

Key Financial Indicators - KIIFB financials (standalone)

Particulars	Unit	2021	2020
Operating income	Rs crore	4,808	2,640
Profit after tax (PAT)	Rs crore	NM	NM
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	3.2	2.1
Interest coverage	Times	NA	NA

 

Key Financials: Reported financials of the Government of Kerala

Particulars	Unit	2021 (CAG Provisionals)	2020 (Accounts)	2019 (Accounts)
Revenue receipts	Rs crore	96,674	90,225	92,854
Revenue deficit	Rs crore	23,256	14,495	17,462
Gross fiscal deficit	Rs crore	38,224	23,865	27,005
GFD/GSDP	%	4.65	2.8	3.5
Debt^/GSDP	%	40.1	34.3	34.6
RR/interest	Times	5.4	4.5	5.5

 

List of covenants

Salient features of bank loans backed by state government guarantee

• Term loans has principal moratorium of two years, during which DSRA of two quarters of interest will be maintained for all lenders except one, where DSRA is created after the moratorium. Following the moratorium, there will be two quarter DSRA of interest and principal obligations for all the lenders.
• There is step-up allocation of the MVT and complete allocation of the petroleum cess to KIIFB under the KIIF Act. The cash flow will be prioritised for debt servicing.
• The DSRA will be replenished, if dipped into, by way of drawdown on MVT/petroleum cess receipts in the KIIFB designated receipt account.

 

Transaction structure:

Date	Particulars
T-6	KIIFB to maintain sufficient balance in the escrow account.
T-5	Lender shall monitor sufficiency of balance in the escrow account. If balance is inadequate, the DSRA will be dipped into. If the DSRA is utilised for payments, the shortfall should be replenished on priority by the borrower from the escrow account, which receives the inflow from the Government of Kerala pertaining to the borrower’s share of MVT and petroleum cess as per the KIIF Act.
T	Due date for the payment.
T+1	Invocation of guarantee through demand for payment notice. The guarantor shall make good the payment corresponding to the amount due to the lender within 30 days from the due date of the payment (T+30).
T+29	If the guarantee is not invoked by the lender, the guarantor shall make good payment of the amount due to the lender within 30 days of the due date.
T+30	Deemed date of default.

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Type of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Long Term Loan	NA	NA	Jan-29	1000	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Jan-31	500	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Feb-29	500	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Sep-31	200	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Feb-32	250	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	June-31	750	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	June-33	500	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Dec-31	1250	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Oct-33	1000	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Dec-34	700	NA	CRISIL A+ (CE) /Negative
NA	Long Term Loan	NA	NA	Dec-34	500	NA	CRISIL A+ (CE) /Negative
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	2850	NA	Provisional CRISIL A+ (CE) /Negative