Detailed Rationale

CRISIL Ratings has placed its rating on the bonds issued by the Andhra Pradesh Capital Region Development Authority (APCRDA) on ‘Rating Watch with Negative Implications’.

 

The negative watch follows non-adherence of the T-structure by APCRDA due to inadequate funding of the debt service reserve account (DSRA) and bond servicing account (BSA). As per the T-structure, the Government of Andhra Pradesh (GoAP) is required to credit the bond servicing account in advance with funds amounting to 1.5 times the upcoming debt obligation. It is also required to maintain debt servicing for two quarters in the DSRA. However, APCRDA has Rs 204 crore and Rs 27 crore in the DSRA and BSA, respectively, against the required balances of Rs ~300 crore and Rs ~225 crore, respectively. If the shortfall in the fund requirement is not met by T1-7 days (T1 being the date of repayment), funds from the DSRA will have to be utilised to fund the BSA for meeting the debt obligation of ~ Rs 150 crore due on November 16, 2023. This will be a key rating monitorable.

 

The deficit in BSA and DSRA is expected to be met through supplementary budget from the GoAP. APCRDA has also separately requested GoAP for Rs 178 crore (on August 16, 2023) and has further requested allocation of Rs 570 crore through the supplementary budget. Approvals for both are currently pending.

 

CRISIL Ratings had downgraded the rating on the bond programme of APCRDA to ‘CRISIL A-/(CE)’ from ‘CRISIL A+(CE)/Negative’ on August 18, 2022, and placed it on ‘Watch with Negative Implications’ on account of non-adherence to the T-structure due to failure to maintain funds amounting to next two quarters of debt servicing in the DSRA. The rating action also reflects the increasing strain on the financial risk profile of the guarantor, GoAP, as manifested in, among others, the reduction in its funding support to meet APCRDA’s debt obligation.

 

On November 16, 2022, the rating was removed from negative watch and was reaffirmed at ‘CRISIL A-(CE)/Stable’ because APCRDA made timely payment for interest servicing, which was due on that date, while adhering to the T-structure. Additionally, supported by fund infusion from the GoAP, APCRDA also credited the BSA with funds equivalent to 1.5 times the debt obligation due in the next quarter.

 

The rating is also constrained by the increasing liquidity strain on the finances of GoAP is due to elevated revenue deficits (27.6% of revenue receipts for fiscal 2023) and improving but high indebtedness (43% of gross state domestic product [GSDP]) in fiscal 2023 (versus 46% in fiscal 2021 and 45% in fiscal 2022; CAG provisionals). This is likely to continue over the medium term as well, considering the high revenue expenditure of the state. Furthermore, the economic management of the state is weak due to reliance on ways and means advances, overdraft facility and special drawing facilities extended by the Reserve Bank of India (RBI). 

 

Replenishment of DSRA and BSA to required levels will remain key monitorables and requirements for resolution of the negative watch.

Analytical Approach

CRISIL Ratings has applied its criteria for rating instruments backed by guarantees. The rating factors in the support expected from the GoAP. In addition to the guarantee, the payment mechanism is protected by enhanced liquidity through the DSRA to mitigate the risk of delayed payment from the state government.

Key Rating Drivers & Detailed Description

Strength:

• Presence of guarantee from the GoAP and strong payment structure: The issuance benefits from the unconditional and irrevocable guarantee from the GoAP for both interest and principal obligation, credit enhancement provided by a well-defined T-structured guarantee trigger mechanism, and independent trustee monitoring mechanism.

 

The payment structure requires the presence of a two-quarter upfront DSRA as a liquidity cushion, and 1.5 times forthcoming debt obligation in the BSA, which lowers the risk of any delay in receipt of payment from the state government. While APCRDA has sufficient funds for the upcoming debt obligation on November 16, 2023, the DSRA and BSA balances currently do not adhere to the T-structure of the bonds.

 

Adherence to the T-structure, maintenance of the DSRA, and timely support from the state government will be key monitorables.

 

Weaknesses:

• Modest economic structure of Andhra Pradesh: The state has a weak economic structure with lower-than-average share of the secondary sector and higher share of the primary sector in the GSDP. This has an adverse impact on the tax to GSDP ratio as the secondary and tertiary sectors have higher tax potential. Socio-economic and human development indicators are modest (for instance, literacy rate is 67% versus the national average of 74%), thereby necessitating higher social outlays. Andhra Pradesh has high per capita income and rapid GSDP growth, driven by improved tertiary and primary sectors.

 

• High deficit and indebtedness with average economic management: In fiscal 2023, based on CAG provisionals, overall revenue rose 2.5% year-on-year because of growth in collection of goods and services tax (GST). The state received revenue deficit grants of Rs 10,549 crore in fiscal 2023 against Rs 17,257 crore fiscal 2022, based on the Fifteenth Finance Commission recommendation. The tax revenue of the state (includes own taxes and the state’s share in central taxes) increased by 9.5% in fiscal 2023 against growth of 24% in fiscal 2022 on a low base.

 

On the other hand, revenue expenses increased 26% and 16% in fiscals 2023 and 2022, respectively, over the previous fiscals. Hence, revenue deficit to revenue receipts increased to 28% in fiscal 2023 from 4% in fiscal 2022. Lower revenue deficit in fiscal 2022 was supported by GST compensation cess and loans from the centre.

 

Capital outlays have been under review in Andhra Pradesh and significantly reduced by 56% in fiscal 2023 and 14% in fiscal 2022 year-on-year. Gross fiscal deficit (GFD) to GSDP ratio increased to 3.8% in fiscal 2023 from 1.9% in fiscal 2022. It is expected to remain elevated in the near term owing to higher revenue deficits and moderate capital expenditure. Although total debt plus guarantee to GSDP ratio improved to 43% in fiscal 2023, it remained high (45% and 44% in fiscals 2023 and 2022, respectively). Andhra Pradesh continues to rely on ways and means advances, overdraft and special drawing facilities extended by the RBI to manage cash flow mismatches.

 

The central government provided a loan of ~Rs 3,200 crore to Andhra Pradesh in fiscal 2022 to compensate for the lower GST collection, which has helped to fund expenses partially. The interest and principal obligation on this loan will be serviced by the centre from future cess collections.

Liquidity: Adequate

The T-structure requires presence of two quarters of DSRA and 1.5 times the debt obligation in the BSA. However, as on August 31, 2023, APCRDA had ~Rs 204 crore in the DSRA against requirement of Rs ~297 crore and Rs 27 crore in the BSA against requirement of Rs ~225 crore. APCRDA has raised bills of Rs ~178 crore for servicing the upcoming payment and has also requested for additional budget of Rs ~570 crore for meeting the requirements as per the T-structure. The funds are awaited from the government and expected soon, as informed to CRISIL Ratings.

 

Timely replenishment of the DSRA and BSA and funding support from GoAP will remain key monitorables.

Rating Sensitivity factors

Upward factors:

• Sustained industrial growth with improvement in socio-economic indicators
• Gradual reduction in state indebtedness to below 35% of the GSDP
• Track record of timely funding of account to avoid meeting obligation from DSRA

 

Downward factors:

• Any event of dip into DSRA account to meet the debt obligation or maintenance of less than two quarters of upcoming debt obligation in the DSRA on sustained basis
• Invocation of guarantee or soft call to the government for meeting the debt obligation
• Significant increase in revenue deficit for the state government impacting their liquidity profile

Unsupported ratings  ‘CRISIL B’

CRISIL Ratings has introduced a 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the circular from the Securities and Exchange Board of India dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the primary cash flow that APCRDA derives from land monetisation as well as budgetary support from the state government. Primary cash accrual remains weak, which is compounded by reduction in budgetary support from the government. APCRDA currently has ~ 3,300 acres of land which it can monetize.

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 of Andhra Pradesh.

 

Government of Andhra Pradesh reported financials:

Particulars*	Unit	2023 (CAG)	2022 (Accounts)	2021 (Accounts)
Revenue receipts	Rs crore	157668	153825	119447
Revenue deficit/ (surplus)	Rs crore	43587	5312	33229
Gross fiscal deficit	Rs crore	49,953	21714	52856
GFD/GSDP	%	3.8%	1.9%	5.2%
Debt^/GSDP	%	42.7%	45.1%	43.5%
RR/Interest	Times	6.18	6.94	5.97

^including guarantees

*CRISIL Ratings-adjusted numbers

Key Financial Indicators: APCRDA

Particulars	Unit	2023**	2022*
Operating income	Rs crore	63	39
Profit after tax (PAT)	Rs crore	(208)	(204)
PAT margin	%	(333)	(523)
Adjusted debt/adjusted networth	Times	0.5	1.2
Interest coverage	Times	0.13	0.07

*Unaudited financials

**Provisional

List of covenants

The material covenants of the instruments are as follows:

• Neither the bondholders nor the issuer shall have any right to exercise a put 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 on 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).
• The Andhra Pradesh government 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 obligation[1]
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	Debt servicing 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.

 [1] Standing instruction to the principal banker