Detailed Rationale

CRISIL Ratings has reaffirmed its 'Provisional CRISIL BBB+/Stable' rating on the bond of Howrah Municipal Corporation (HMC).

 

The rating continues to reflect the strength of the proposed trustee-administered escrow and payment mechanism and adequate liquidity in the form of a debt service reserve account (DSRA), along with the moderate economic base and financial risk profile of HMC. These strengths are partially offset by limited income sources, leading to dependence on support from the Government of West Bengal; inadequate service level arrangements; low cost of recoveries and a modest pace of reforms.

Analytical Approach

For arriving at its rating, CRISIL Ratings has applied its criteria on future flow securitisation.

Key Rating Drivers & Detailed Description

Strengths:

        Strength of the escrow mechanism

The escrow and bond payment mechanism provides adequate strength to the bond issuance. The tax and user charge receipts escrowed at collection, trustee-managed escrow mechanism, creation of DSRA and payment structure with recourse to the originator ensure adequate safety for timely payment of debt to the investors. The debt service coverage ratio is expected to be moderate to high throughout the tenure of the bond. The payment mechanism for coupon and redemption is given in the annexure. Any deviation from the proposed structure will be monitorable.

 

        Moderate financial risk profile

Financial risk profile is driven by need-based funding support from the state government. Revenue receipt is estimated to have increased to Rs 282 crore in fiscal 2022 from Rs 189 crore in fiscal 2021, with the corporation posting operating deficit of Rs 18 crore against operating surplus of Rs 60 crore. However, HMC expects receipts revert to pre-pandemic levels with revenue of Rs 300-330 crore per annum over the medium term.

 

        Moderate economic base driven by demographic profile, and robust connectivity

Howrah is known as an engineering hub, mainly the light engineering industry. Burn Standard Company Ltd and Shalimar Paints have plants in Howrah; there are several jute and foundry players as well. The second-oldest engineering institution in India, the Indian Institute of Engineering Science and Technology, is also in Howrah. With a literacy rate of ~89%, Howrah has a strong resource of educated youth. Furthermore, the city has robust connectivity in terms of roads, railways and air.

 

Weaknesses:

        Dependence on support from the state government

Revenue source includes property tax, licences, non-tax revenue and building/plan sanction fees. These sources contribute 22-32% to the overall revenue, while grants from the state government account for the balance. While the corporation does not levy octroi or receive GST (Goods and Services Tax) compensation, the state supports HMC through assigned revenue and grants. Majority of the capital expenditure (capex) is funded by the state government via grants under various schemes. Timeliness and adequacy of funds from the West Bengal government remain key rating sensitivity factors.

 

         Modest service arrangements and low collection efficiency

The overall property tax collection efficiency was low at ~29% for fiscal 2022. The corporation charges the bulk users for its water supply services. No tariff is charged for sewerage, drainage and solid waste management. Recovery of maintenance cost (through user charges) charged by HMC is low.

 

The water supply service of HMC is average, with per capita water supply only slightly lower than standard per capita water consumption, moderate population and area coverage (~70%) and unaccounted for water (~11%). To achieve the goal of universal coverage, HMC plans to fill the gaps in distribution network, add required capacity for elevated storage and increase the per capita under Atal Mission for Rejuvenation and Urban Transformation 2.0 and 15th Finance Commission schemes. Though the solid waste management services of HMC are average with 100% door-to-door collection, it only carries out 20% segregation and some waste treatment. Despite being a part of the obligatory services, HMC has limited sewerage network coverage and no user charges are being charged for this service as of now. Progress in e-governance has been average, while limited progress is seen in implementation of geographic information systems.

Liquidity: Adequate

HMC has limited revenue surplus against nil debt obligation (apart from obligations pertaining to the bond issuance).

Outlook: Stable

HMC will continue to benefit from strength of the escrow mechanism and moderate financial risk profile and economic base

Rating Sensitivity factors

Upward factors

• Sustained growth in revenue receipts with share of own revenue more than 50%.
• Significant improvement in property tax collection efficiency and cost recovery of services.

 

Downward factors

• Reduction in support from the state government.
• Large, debt-funded capex weakening debt protection metrics, with operating surplus to debt ratio below 0.1 times.
• Non-adherence to the escrow and payment mechanism.

Additional disclosures for the provisional rating

The 'provisional' rating will be converted into a 'final' rating on receipt of the following documents duly executed as required:

• Escrow agreement
• Representation and warranties letter
• Debenture trustee awareness letter
• Final term sheet

 

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale or report indicating conversion of the 'provisional' rating into the 'final' rating will be published on the CRISIL Ratings website on receipt of the required documents.

 

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

 

The final rating assigned following the 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 the pending documentation considered while assigning the provisional rating as mentioned earlier, 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 Corporation

HMC is the local government of Howrah. It is the second-largest municipal corporation and urban area in the state. In 2015, Bally municipality was merged with the corporation.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue receipts	Rs crore	282	189
Revenue surplus	Rs crore	(18)	(60)
Revenue surplus/revenue receipts	%	-6%	-31%

(Source: HMC)

 

Annexure

Following are the contours of the escrow structure pertaining to the Rs 10 crore bond programme:

 

• Property taxes or any other specified revenue/cash flow deposited in the account(s) where the same shall be collected (collection accounts(s)) and transferred to a separate no-lien
• escrow account for debt servicing.
• This transfer shall be done on a daily basis except on the last business day of every month. Establishing separate interest payment account (IPA) and sinking fund account (SFA) with the escrow banker as per the terms of each series. Bondholders or lenders have first and pari-passu charge over escrow account, IPA and SFA for respective accounts.
• On the last business day of every month, the minimum balance (pro-rata monthly contribution towards IPA and SFA) shall be transferred to respective accounts established for servicing debt for each debenture with the escrow banker.
• In case of any shortfall from transfer from escrow account, the corporation shall make good the shortfall from the funds from other account(s).
• The funds lying in collection account(s) will not be utilised for any purpose other than transfer to escrow account.
• Eligible bondholders and lenders shall have first pari-passu charge over the escrow account and the collection account(s).

 

Interest payment mechanism

T – Interest payment date

Day
T-25	The trustee shall check the amount lying to the credit of interest payment account. In case of any shortfall in amount, the trustees shall intimate the corporation of the shortfall
T-15	The corporation shall make good the shortfall in the interest payment account, if applicable
T-14	In case of shortfall, trustee shall trigger the payment mechanism and instruct bank to transfer the shortfall amount from DSRA to the interest payment account
T	Interest payment is done

*Any amount drawn from the DSRA should be deposited back in it, as per the mechanism indicated above

 

Redemption mechanism

T – Redemption date

Day
T-25	The trustee shall check the amount lying to the credit of SFA. In case of any shortfall in amount, the trustees shall intimate corporation of the shortfall
T-15	The corporation shall make good the shortfall in the SFA
T	Redemption payment is done

 

The trustee shall keep the rating agencies informed of any shortfall in interest payment account, the DSRA, SFA and any transfer from the DSRA to the interest payment account

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Bond*	NA	NA	NA	10	Simple	Provisional CRISIL BBB+/Stable

*Yet to be issued