Rating Rationale
December 28, 2018 | Mumbai
Kerala Infrastructure Investment Fund Board
'Provisional CRISIL A+(SO)/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.5000 Crore
Long Term Rating Provisional CRISIL A+(SO)/Stable^ (Assigned)
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 will be supported by certain critical documentation by the issuer, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015, directive by the Securities and Exchange Board of India (SEBI), 'Standardising the term, rating symbol, and manner of disclosure with regard to conditional/ provisional/ in-principle ratings assigned by credit rating agencies (CRAs)'
Detailed Rationale

CRISIL has assigned its 'Provisional CRISIL A+(SO)/Stable' rating to long term bank loan facilities of Rs 5000 crore of Kerala Infrastructure Investment Fund Board (KIIFB). The provisional rating will be converted to a final rating after receipt of executed guarantee deed and the final sanction letters from the company.
 
The rating reflects the strength of a proposed unconditional and irrevocable guarantee provided by the Government of Kerala (GoKL), escrow and payment mechanism, and adequate liquidity in the form of a debt service reserve account (DSRA) and KIIFB Corpus.
 
The rating also factors in the allocation of a robust stream of cash-flow (motor vehicle tax along with petroleum cess) for debt servicing. The rating is also supported by strong socio-economic indicators of the state, which offer flexibility for lowered social sector spends if required, and the expectation that GST-led tax revenue may help bridge part of the deficit over the medium term. However, the ratings are constrained by the moderate economic structure of Kerala with a small secondary sector, weak state finances with consistently high deficit and indebtedness, and periodic use of Ways and Means Advances (WMA).
 
While the floods in August 2018 is expected to have a negative impact on the state's economy, it is expected to be only in the short-term.

Analytical Approach

For arriving at the rating, CRISIL has applied its criteria on rating instruments backed by guarantees. The ratings of KIIFB factors in support expected from the GoKL. CRISIL believes that KIIFB will, in case of exigencies, receive distress support from GoKL for timely repayment of debt obligations under the KIIFB Act.

In addition to the state guarantee, the payment mechanism offers access to a top-line escrow of motor-vehicle tax and petroleum cess, and is also protected by an enhanced liquidity cushion through the DSRA and KIIFB Corpus. 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 strong payment structure with an unconditional and irrevocable guarantee from GoKL
The issuance benefits from the credit enhancement provided by a well-defined T-structured guarantee trigger mechanism, an adequate liquidity buffer, and a strong oversight mechanism.
 
The primary cash flow to be harnessed for bond servicing are the motor vehicle taxes and the petroleum cess allocated to KIIFB under the KIIFB Act. The motor vehicle tax collection has been on a secular uptrend, and there is a progressive step-up in terms of allocation to KIIFB from 10% in the first year (2016) to 50% in the fifth year with equal increments in the interim. The petroleum cess has a limited track record, having been introduced in 2015. In the event of a shortfall in primary cash flow, the structure draws support from the legal recourse to the state government via a guarantee invocation framework, as well as the statutory obligation of the government to make good the shortfall under the KIIFB Act.
 
In addition, the rating is supported by two quarters of rolling DSRA as a liquidity cushion, which lowers the risk of any delay in receipt of payment from the state government. Also, a two quarter lien on KIIFB corpus of Rs 2400 crore serve as an additional liquidity cushion.
 
If the DSRA/ KIIFB Corpus is utilised, the structure provides for use of the motor vehicle tax/ petroleum cess, to be first used to top up the DSRA and the KIIFB corpus, well before the next payment cycle. The rating also factors in the strong internal control mechanism exercised by the Fund Advisory and Trustee Committee (FTAC), comprising eminent external members.
 
CRISIL believes that the presence of adequate liquidity buffers and the internal oversight mechanism strengthens the payment structure and provides adequate protection from any administrative delay.
 
* Strong socio-economic parameters
Kerala has invested significantly in building its human capital through enhanced social sector spends. Its social sector/aggregate expenditure ratio is highest among peers, and the continued outlays have healthy outcomes as Kerala remains the top state in terms of 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.
 
Weakness
* Kerala's small secondary sector, consistent revenue deficit, and high dependence on remittances
The share of the secondary sector in Kerala's gross state domestic product (GSDP) is low, partly weakened by the state's modest industry friendliness as reflected in its lower-than-average score for Ease of Doing Business. The state has had consistent revenue deficit for the past few years, primarily due to modest share in central taxes, low own tax revenue and own non-tax revenue, and large committed expenditure base under salaries, pensions, and interest (62% in fiscal 2018 RE). This weakness is offset by an anticipated increase in tax revenue under the GST regime, since Kerala is a consumption-driven state. However, sharp control of discretionary revenue expenditure will be needed to rein in the revenue deficit. Furthermore, dependence on remittances from the large non-resident Keralite base, settled largely in West Asia, leave the state vulnerable to oil price fluctuation and foreign policy swings of the host nations.
 
* High leverage with moderate economic management
The Kerala government's leverage remains high, with total debt plus guarantee to GSDP at 30.6% in fiscal 2018 RE, and is expected to remain elevated over the medium term. With high gross fiscal deficit (3.3% of GSDP in fiscal 2018 (RE)), the state has limited space for incremental borrowing in its own budget, and has to access off-budget borrowings (through KIIFB) for productive capital outlay. Immediate measures will need to be taken to rein in both the deficit and indebtedness, both of which are higher than FRBM guidelines, and the state government's ability to execute the same in a timely manner will be a key rating sensitivity factor. The state has also accessed WMA to manage liquidity, indicating moderate economic management.
Outlook: Stable

CRISIL believes KIIFB's bank loans will continue to benefit from its strong payment structure and support from GoKL.
 
Upside scenario
* Sustained improvement in Kerala's deficit and indebtedness
 
Downside scenario:
* Deterioration in GoKL's fiscal performance over the medium term.
* Narrowing of liquidity buffers or non-adherence to payment structure
 
Liquidity Position: Adequate
CRISIL believes that KIIFB has adequate liquidity supported by its daily escrow of motor vehicle taxes and the petroleum cess which will be prioritized for debt servicing under the KIIFB Act. Additionally it has two quarters of rolling DSRA as a liquidity cushion, which lowers the risk of any delay in receipt of payment from the state government. Also, a two quarter lien on KIIFB corpus of Rs 2,400 crore serve as an additional liquidity cushion. The company maintained a cash balance of Rs 4,046 crore as on March 31 2018 against nil debt maturing in the next 12 months.

About the Company

KIIFB was formed on November 11, 1999, under the Kerala Infrastructure Investment Fund 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 with an intent to mobilise funds for the infrastructure development of Kerala. It is headed by the political and bureaucratic leadership of the state.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Cr. 63.35 7.04
Profit After Tax (PAT) Rs. Cr. 30.34 6.32
PAT Margin % 48% 90%
Adjusted Debt/Adjusted Net worth Times NA NA
Interest coverage Times 10.41% NM
NM: Not meaningful
 
Key Financial Indicators - Government of Kerala reported financials
Particulars Unit 2018 (RE) 2017 (Accounts)
Revenue Receipts Rs crore 88,267 75,612
Revenue Deficit Rs crore 13,079 15,484
Gross Fiscal Deficit  Rs crore 22,774 26,450
GFD/GSDP    % 3.3% 4.0%
Debt^/GSDP % 30.7% 30.2%
RR/Interest    Times 6.52 6.24
^Including guarantees

Any other information
The 'provisional' rating will be converted to a 'final' rating, on receipt of the following executed documents:
 

  • Deed of guarantee
  • Accounts agreement
  • Final sanction letter of respective bank facilities
  • Representations and warranties letter

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale/report indicating conversion of the 'provisional' rating to 'final' rating will be published on the CRISIL website on receipt of the required documents.
 
Salient features of the bank loans backed by the state government guarantee:
 

  • There will be upfront creation of liquidity facility in the form of DSRA for next two quarterly payments (in the form of cash). The DSRA and KIIFB Corpus will be replenished, if dipped into, by way of drawdown on motor vehicle tax/cess receipts in KIIFB Designated Receipt Account.
  • There is step-up allocation of motor vehicle tax and complete allocation of petroleum cess to KIIFB under the KIIFB Act. The cash flow will be prioritised for debt servicing.
  • The liquidity reserves will be replenished by tapping into motor vehicle tax/cess receipts in KIIFB Designated Receipt Account. The state government also has a joint and several liability to replenish these accounts, if used, in a time bound manner under the terms of their guarantee.

Transaction structure:
Assuming T1 and T2 are scheduled payment dates, in January and April, respectively, of Year Y, and Y-1 is the previous year.


Date Particulars
March
Y-1
(T1-270)		 Budgetary allocation made for meeting the debt obligation of next year. The allocation is made mandatory under the KIIFB Act.
T1-45 Bank will monitor the sufficiency of the balance. If there is any shortfall, the bank will inform KIIFB to make good the shortfall, with an advisory to FTAC, a soft call under the guarantee to GoKL and notification to the rating agency.
T1-45 to T1-25 Time given to KIIFB to make good the shortfall.
T1-25 Bank will monitor the sufficiency of the balance, and if the balance is inadequate, DSRA will be dipped into to cover the shortfall.
T1-20 Bank will monitor the sufficiency of the balance, and if the balance is inadequate, the KIIFB corpus will be dipped into to cover the shortfall.
T1-15 Bank will monitor the sufficiency of the balance, and if the balance is inadequate, the state guarantee will be invoked to the extent of meeting the next payment, as well as for replenishment of the DSRA and KIIFB to the extent utilised.
T1 Meet the bond payment.
* The steps from T1-45 to T1 are repeated for the second semi-quarterly cycle, that is, T2-45 to T2.
 
Any major change in the salient features or transaction structure in the final documents will be a rating sensitivity factor.
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Type of instrument Date of allotment Coupon Maturity date Issue Size
(Rs crore)		 Rating Assigned
with Outlook
NA Proposed Long Term Bank Loan Facility NA NA NA 5000 Provisional CRISIL A+(SO)/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT    --  03-10-18  Withdrawal    --    --    --  -- 
        10-05-18  Provisional CRISIL A+(SO)/Stable               
        17-01-18  Provisional CRISIL A+(SO)/Stable               
Fund-based Bank Facilities  LT/ST  5000.00  Provisional CRISIL A+(SO)/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 5000 Provisional CRISIL A+(SO)/Stable -- 0 --
Total 5000 -- Total 0 --
Links to related criteria
Rating Criteria for State Governments
CRISILs Bank Loan Ratings
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Understanding CRISILs Ratings and Rating Scales

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