| Kerala Infrastructure Investment Fund Board | ||||||
| Rating Reaffirmed | ||||||
| Rating Action | ||||||
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| & 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. | ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘Provisional CRISIL A+ (CE)/CRISIL A+ (CE)/Negative’ rating on long-term bank facilities of Kerala Infrastructure Investment Fund Board (KIIFB).
The ratings reflect the unconditional and irrevocable guarantee provided by the Government of Kerala (GoKL), the escrow and payment mechanism and adequate liquidity, backed by a debt service reserve account (DSRA) equivalent to two quarters of debt obligation and the KIIFB corpus. The rating also factors in the regular and timely allocation of motor vehicle tax (MVT) and petroleum cess for debt-servicing, and the state's strong socio-economic indicators.
On September 15, 2020, CRISIL Ratings had revised its outlook to ‘Negative’ because of the expected strain on the financial risk profile of GoKL driven by pandemic-induced disruptions and decline in economic activity. This was expected to increase revenue deficit (RD) and indebtedness[1] for the state. While the revenue receipts (RR) grew 6% in fiscal 2023 (on provisional basis) supported by growth in tax collections, slowdown in recovery over the medium term may result in sustained elevated deficit and indebtedness, leading to a rating downgrade. The impact of revised off-budget borrowing (OBB) norms, as directed by the central government, on the borrowing capacity of GoKL, and in turn KIIFB, will remain key monitorable. [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, lowering the risk for the instrument. |
Key Rating Drivers & Detailed Description Strengths
The primary cash flow for meeting the 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 daily 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; the allocation has been 50% thereafter. For any shortfall in cash flow, the structure draws support from the statutory obligation of the government to cover the shortfall under the KIIF Act 2016. KIIFB has received MVT funds of Rs 2,470 crore for fiscal 2023 and is expected to receive Rs 2,808 crore in fiscal 2024. Of the total, Rs 623 crore has been received as of May 2023.
GoKL has set up a robust internal control mechanism exercised by the fund trustee and advisory commission. The committee has professionals who have previously worked with Reserve Bank of India (RBI) and various other financial institutions, thereby instilling financial discipline for servicing debt. KIIFB maintains surplus liquidity of ~Rs 2,500 crore as KIIFB corpus and had cash and equivalents of Rs 6,413 crore as on May 29, 2023. Though cash may reduce as disbursements pick up, KIIFB keeps liquidity buffer of six months of project payments and debt obligation as a practice. Adequate liquidity buffer, along with internal oversight mechanism, should provide the necessary protection from administrative delay in receiving funds from the state government.
For long, Kerala has focused on developing human capital, having chosen to trade off physical capital. The state government is now focused on hard capital development. KIIFB is critical as an off-balance sheet vehicle with an assured source of revenue (duly ring-fenced) and in charge of implementing significant infrastructure plans. The government will 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 80,363 crore and made cumulative disbursements of around Rs 24,624 crore as of May 2023. The organisation is headed by the political and bureaucratic leadership of the state.
Kerala has invested significantly in building its human capital through enhanced social sector spend, which is the highest among peers. Owing to continued outlays, 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.
Weaknesses:
The share of the secondary sector in Kerala's Gross State Domestic Product (GSDP) is low, partly weakened by modest but improving industry friendliness, as reflected in improvement in ease of doing business ranking to 15th in 2020 compared to 28th in 2019. The state had revenue deficit in the past few fiscals, primarily because of modest share in central taxes, low own-tax and non-tax revenues and large committed expenditure (around 63% of revenue expenditure) under salaries, pensions and interest.
Owing to revival of economic activity, the state’s tax collection grew 18% in fiscal 2023 (on provisional basis) backed by support from the Centre in the form of revenue deficit grants based on the Fifteenth Finance Commission recommendation, improved state Goods and Services Tax, higher devolutions from central government and better sales tax collection. While the revenue deficit narrowed to Rs 6,823 crore in fiscal 2023 (Rs 22,310 crore in fiscal 2022), revenue deficit is expected to continue over the medium term. Based on the Fifteenth Finance Commission recommendation, between fiscals 2022 and 2026, the state’s share in central tax pool will be 1.925%. However, revenue expenditure for the state increased by 10%. So, while the revenue deficit to GSDP ratio is estimated to have narrowed to 0.7% in fiscal 2023 from 2.5% in fiscal 2022, the ratio will remain high and a key monitorable.
Total debt plus guarantee to GSDP ratio marginally improved to 42.4% in fiscal 2023 from 43.6% in fiscal 2022. The state continues to rely on ways and means advances, special drawing facility and overdraft facility extended by the RBI, indicating modest economic management.
In March 2022, the central government informed the states that OBB are to be equated with the state’s own debt and any such fund raised by the state governments in fiscals 2021 and 2022 would need to be adjusted out of the borrowing ceiling of fiscal 2023. The Centre subsequently relaxed norms for adjusting OBBs and permitted the states to adjust OBBs of the previous fiscal against their borrowing ceilings of the next four years till March 2026. The new norms have tightened GoKL’s borrowing budget by ~Rs 4,000 crore annually till fiscal 2026.
However, KIIFB remains strategically important to GoKL to implement infrastructure and welfare schemes and the government has permitted the entity to move forward with their borrowing plans for this fiscal. The initial approved borrowing plan in fiscal 2023 was Rs 8,000 crore and KIIFB received sanction of Rs 4,368 crore. For fiscal 2023, borrowing has been lower-than-anticipated, as the project disbursements have also been lower than planned. KIIFB had anticipated bulk payments for certain infrastructure projects in the fiscal 2023, which did not materialise, and hence, borrowing requirements have been lower.
For fiscal 2024, the borrowing plan approved by the Board is Rs 10,000 crore. |
Liquidity: Adequate Liquidity is supported by daily escrow of MVT and petroleum cess, which will be prioritised for debt servicing. KIIFB had surplus liquidity of around Rs 2,500 crore as corpus. Total liquidity available with KIIFB is of ~Rs 6,400 crore as of May 2023. Net cash inflow from MVT and cess collections will be adequate to meet debt obligation in fiscal 2024. |
Outlook: Negative KIIFB will continue to benefit from its strong payment structure and support from GoKL. However, the state finances will remain constrained on account of high indebtedness and large revenue deficit, which may continue in fiscal 2024 because of high expenses and reduction in revenue deficit grants. |
Rating Sensitivity factors Upward factors
Downward factors
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Adequacy of credit enhancement structure The guarantee provided by GoKL is unconditional, irrevocable and enforceable 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 robust cash flow, defined under the KIIF Act, which is adequate to cover the interest and principal obligations and operational expenses. The payment mechanism is supported by a well-defined T-structured guarantee trigger mechanism.
Transaction structure:
GoKL supports KIIFB through budget allocation and escrowing of robust cash flow, defined under the KIIF Act, which is adequate to cover the interest and principal payments and the operational expenses. With minimal standalone cash accrual, debt obligation is met through support from the state government. However, the support required by KIIFB from the GoKL remains around 2% of the latter’s RR. Also, overall guarantees provided by GoKL have been taken into account while assessing the credit risk profile of the state government. CRISIL Ratings has considered stress scenario to test the adequacy of the structure, where the borrower is unable to honour its debt obligation from its cash flows. CRISIL Ratings believes that the guaranteed debt will be fully serviced in a timely manner even under stress scenario. |
Unsupported ratings CRISIL BBB CRISIL Ratings has introduced the suffix CE for instruments having explicit credit enhancement feature in compliance with the Securities and Exchange Board of India 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. The business risk profile factors in the strategic importance of KIIFB to the state to boost infrastructure development. The board has robust cash flow, which is adequate to cover interest and principal obligations 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 of being shared shortly:
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 after 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 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 its ‘CRISIL BBB’ rating. |
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 KIIFB KIIFB was formed on November 11, 1999, under the KIIF Act, 1999 (Act 4 of 2000), to manage KIIF. 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 Reported financials of GoKL
*CRISIL Ratings adjusted
Key financial indicators: Reported financials of KIIFB
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List of covenants Salient features of bank loans backed by state government guarantee
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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