Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank facility and bonds of Cauvery Neeravari Nigama Limited (CNNL) at 'CRISIL AA- (CE)/Stable’.

 

For the bonds, the company has been adhering to the payment structure (T-30), with funds credited to the debt servicing account well before the invocation date of state guarantee. The rating is supported by an unconditional and irrevocable guarantee from the Government of Karnataka (GoK) and a trustee-administered payment mechanism. The rating, therefore, reflects the credit risk profile of GoK.

 

For the bank loan, although the company is not adhering to the payment structure (T-25 days), it has provided an undertaking that it will maintain sufficient liquidity in the form of fixed deposits to mitigate any potential risk of delay in receipts of funds from the state government. Furthermore, these are backed by an unconditional and irrevocable guarantee from the state government.

 

GoK has healthy economic management, strong financial risk profile and robust tertiary sector. These strengths are partially offset by modest socio-economic indicators and dependence on rains for irrigation, requiring larger state support during a weak monsoon.

Analytical Approach

For arriving at its rating, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees.

Key Rating Drivers & Detailed Description

Strengths:

Healthy economic management by the Government of Karnataka:

The state government has generally maintained fiscal discipline with healthy liquidity management. Gross fiscal deficit (GFD) consistently remained below prudential limits. Borrowing is mainly to fund capital outlays, ensuring moderate debt. The state government had not resorted to any borrowing under ways and means advances, indicating healthy liquidity.

 

Strong financial risk profile of the state government:

The state is self-reliant in terms of revenue, with its tax and non-tax revenue accounting for around 65-70% of the receipts. Revenue grew by modest ~6% in fiscal 2023 after recording 25% growth in fiscal 2022. This was owing to discontinuation of compensation loans provided by Centre from fiscal 2023 and muted growth from sales tax collections.

 

The state government continues to have strong control over committed expenditure (salaries, interest and pension), which is around 35% of the revenue expenditure and significantly lower than that of other states. This provides flexibility to curtail expenditure. The state posted revenue surplus of over Rs 20,000 crore in fiscal 2023 (CAG provisional) as against ~Rs 4,443 crore in fiscal 2022 (accounts) as revenue expenditure declined. Consequently, GFD as a percentage of gross state domestic product (GSDP) improved to 1.6% in fiscal 2023 from 2.4% in fiscal 2022, which was within the limits recommended by Fiscal Responsibility and Budget Management norms. Debt-plus-guarantees-to-GSDP ratio is estimated to have improved to 24.9% in fiscal 2023, compared with 25.4% in fiscal 2022. Capital outlay remained at ~2.5% of GSDP in fiscal 2023. GoK announced implementation of the five guarantee schemes which are expected to increase revenue expenditure going forward. Any large increase in expenditure without commensurate increase in revenue receipts will be a key monitorable.

 

Healthy economic structure of the state government:

The robust tertiary sector accounts for 64% of the GSDP, against the all-India average of 53%. It is supported by Bengaluru’s position as the country’s information technology hub, and is the main driver of economic growth for Karnataka. The state has grown at a healthy nominal GSDP CAGR (compound annual growth rate) of 10.9% during fiscals 2018-23, compared to India’s 8.9% over the same period. The growth trajectory was impacted in fiscal 2021 owing to the pandemic but has recovered.

 

Weaknesses:

Dependence on monsoon for irrigation; modest socio-economic indicators:

A poor monsoon can negatively impact the state's agricultural output as only 34% of the cropped area is irrigated. The state is taking steps to reduce vulnerability to the monsoon by investing in irrigation projects. The capital outlay towards irrigation has reduced to 34% of capital outlay budgeted in fiscal 2024 towards various irrigation and flood control projects, against 40% in fiscal 2023 (revised estimates). However, irrigation segment still accounts for the majority share of the capital outlay.

 

Moreover, socio-economic indicators are modest. Literacy rate is 75% (national average is 74%); the maternal mortality rate is 92 per 1,00,000 births (highest amongst southern states); 21% of the population is below the poverty line (national average is 22%). This may necessitate higher social sector expenditure to improve social parameters.

Liquidity: Strong

The liquidity of CNNL is primarily driven by support from the state government and forms a part of the budget allocation. The debt servicing obligation for fiscal 2024 stands at around Rs 550 crore, which will be covered using funds from the state government. CNNL maintains sufficient liquid surplus in the form of fixed deposits against monthly interest obligation of around Rs 15 crore on bank loans and annually around Rs 17 crore coupon on bonds. The company has also provided an undertaking that it will maintain sufficient liquidity to mitigate any delay in receipt of funds from the state government.

Outlook: Stable

CRISIL believes GoK will maintain its healthy economic management and financial risk profile, over the medium term.

Rating Sensitivity Factors

Upward factors:

• Improvement in socio-economic indicators of the state and,
• Indebtedness below 20% of GSDP on a sustained basis

 

Downward factors:

•         Indebtedness above 28-30% of GSDP on a sustained basis
•         Any reduction in liquidity reserve maintained by the company to below two months of debt obligation

Adequacy of credit enhancement structure

The guarantee provided by GoK is unconditional, irrevocable, and covers the entire rated amount for the bonds. A trustee-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligations.

 

The GoK supports CNNL through budgetary allocation, which is adequate to cover the interest and principal payments and operational expenses. With minimal standalone cash accrual, the entire debt servicing requirement for the company is met through budgetary support from GoK. However, the support required by CNNL from GoK remains insignificant, at less than 5% of the government revenue receipts.

Unsupported ratings: CRISIL A

CRISIL Ratings 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 strategic importance of CNNL for implementation of projects in the Cauvery basin and to achieve the irrigation objectives of the state. While the company does not generate sufficient revenue from its own operations, there is a budgetary allocation towards it on instruments backed by state government guarantee, which is adequate to meet interest and principal payments as well as other operational cash expenses. The rating also takes into account the long track record of timely payments by GoK.

About the Company

CNNL was established in 2003 as a special-purpose vehicle to accelerate the implementation of Cauvery basin projects, which constitute 18% of the state's geographical area and are spread over 11 districts. The main objective of CNNL is to complete, maintain, operate, and modernise irrigation projects, including lift irrigation works and minor irrigation works in the Cauvery basin.

Key Financial Indicators - CNNL standalone financials

Particulars*	Unit	2023 (Provisional)	2022
Total revenue	Rs crore	-	67
Profit after tax (PAT)	Rs crore	-529	-725
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	0.42	0.52
Interest coverage	Times	-0.44	-0.64

*CRISIL adjusted financials

NM: Not meaningful

 

Government of Karnataka

Particulars*	Unit	2023 (CAG)	2022 (Accounts)
Revenue receipts	Rs crore	227,175	213,871
Revenue surplus	Rs crore	21,689	4,443
GFD	Rs crore	35,860	47,934
GFD/GSDP	%	1.6%	2.4%
(Debt+Guarantees)/GSDP	%	24.9%	25.4%
Revenue receipts/Interest	Times	8.9	8.6

*CRISIL Ratings-adjusted

 

List of covenants:

The material covenants of the bonds are as follows:

• In case of default in payment of interest or principal redemption on the due dates, additional interest of at least 2% per annum over the coupon rate will be payable by the company for the defaulting period.
• First mortgage and charge on the company’s properties as may be agreed to in consultation with the trustee and all the monies received/to be received in the designated account on pari passu basis subject to minimum asset cover of 1.25 times in such form and manner as may be agreed to by and between the company and the trustees.
• The company should not have any liability with Canara Bank (trustee), either direct or indirect, and Canara Bank should not have invested in bonds or any other debt instruments of CNNL.
• The GoK has provided an unconditional and irrevocable guarantee for the entire bond issue, and interest and principal payments are fully covered with budgetary support.
• The key features of the tripartite agreement of CNNL (issuer), GoK (guarantor) and Canara Bank (trustee), for ensuring timely repayment of dues to the bond holders, will be as follows:
  • At least 30 calendar days prior to the forthcoming due date for interest or principal (T-30), CNNL shall credit the requisite funds in the trust and retention account (TRA) for servicing the bond holders on the forthcoming due date ('T') and communicate it to the trustee.
  • The funds credited to TRA may be put as short-term fixed deposit (FD), only with banks having rating equivalent to ‘AA’ from CRISIL, with a lien on the FD in favour of the trustee. At least 5 days prior to the due date, the amount invested in FD shall be transferred to the TRA and the interest earned thereon will be credited to the current account of CNNL. After making payment to the bond holders, any amount lying in the credit of TRA may be withdrawn by CNNL.
  • In case CNNL does not deposit the funds into TRA, CNNL shall communicate in writing, at least 30 calendar days prior to the forthcoming due date (T-30), to the finance department of GoK with a copy to the trustee and CRISIL:

a)                   The forthcoming due date ' T', and

b)                   The amount payable to the bond holders as interest or principal on the said due date 'T'

• In case CNNL fails to intimate GoK, the trustee shall intimate GoK at least 25 calendar days prior to the forthcoming due date (T-25).
• In the event that GoK fails to ensure funds in the TRA at least 7 business days prior to the due date (T7), the trustee shall invoke the guarantee issued by GoK on (T-7) and inform CRISIL about the same.
• On invocation of the guarantee, GoK will deposit the necessary funds to the TRA at least 3 days prior to the due date (T-3).
• The amounts due shall be paid to the bond holders on the due date (T Day) by way of RTGS/NEFT/funds transfer. Wherever such facilities are not available, cheques/demand drafts will be dispatched to the investors at least 5 days prior to the due date.

Any other information: Not Applicable