Detailed Rationale

CRISIL Ratings has reaffirmed its ‘Provisional CRISIL A+(CE)/Negative/CRISIL A+ (CE)/Negative’ ratings on the long-term bank facilities of Kerala Infrastructure Investment Fund Board (KIIFB).

 

The ratings continue to 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 ratings also factor 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 rating outlook to ‘Negative’ because of the expected strain on the financial risk profile of GoKL following the pandemic-induced disruptions and decline in economic activity, which had an impact on the revenue deficit and indebtedness[1] for the state.

 

While revenue receipts (RR) as per Comptroller and Auditor General (CAG) de-grew ~6% in fiscal 2024 due to decline in grants received from the central government, revenue expenditure came in ~0.5% higher, leading to higher revenue deficit compared to fiscal 2023. Slowdown in recovery over the medium term may result in sustained elevated deficit and indebtedness, leading to a rating downgrade. That said, GoKL, has been taking initiatives to enhance revenue receipts and rationalise revenue expenditure. 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. Further, with increasing OBB by GoKL, significant impact on the liquidity position of the state because of stricter borrowing norms, and in turn its support extended to KIIFB, will remain key rating monitorables.

[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 debt service reserve account (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:

• Robust cash flow defined under the amended KIIF Act: 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. Total transfers in lieu of Section 7 to KIIFB, including MVT and Cess, was Rs 3230 crore (including lumpsum grants) in fiscal 2024. It expects to receive Rs ~3130 crore in fiscal 2025, of which it has received Rs 1389 crore till July 31, 2024.

 

• Strong internal control mechanism providing protection from administrative delay: The GoKL has set up a robust internal control mechanism exercised by the fund trustee and advisory commission. The commission has professionals who have previously worked with the Reserve Bank of India (RBI) and various other financial institutions, thereby instilling financial discipline for servicing debt. KIIFB maintains surplus liquidity of ~Rs 3,300 crore as KIIFB corpus and had total cash and equivalent (inclusive of the corpus) of Rs ~6,270 crore as on July 31, 2024. 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.

 

• Strategic importance to GoKL for infrastructure development: 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 86,156 crore and made cumulative disbursements of around Rs 29,544 crore as on July 31, 2024. The organisation is headed by the political and bureaucratic leadership of the state.

 

• Strong socio-economic parameters: 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:

• Small secondary sector, continued revenue deficit and high dependence on remittances: The share of the secondary sector in Kerala's 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 revenue and large committed expenditure (around 65% of revenue expenditure) under salaries, pensions, and interest.

 

Based on CAG, the overall revenues in fiscal 2024 declined ~6%. While the overall tax revenue has grown by 4%, decline in grants from central government by ~40% (excluding GST compensation) have led to the decline in overall revenue receipts. Based on the Fifteenth Finance Commission recommendation, between fiscals 2022 and 2026, the state’s share in central tax pool will be 1.925%. Revenue expenditure for the state saw a marginal 0.5% rise in fiscal 2024. The revenue deficit to GSDP ratio is estimated to increase to 1.6% in fiscal 2024 from 0.9% in fiscal 2023, the ratio will remain high and key rating monitorable.

 

• High indebtedness with modest economic management: Total debt plus guarantee to GSDP ratio marginally increased to ~40.7% in fiscal 2024 from 39.9% in fiscal 2023. 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 fiscals till March 2026. The new norms have tightened the borrowing budget of GoKL by ~Rs 3,000-4,000 crore annually till fiscal 2026. These OBB norms have led to a reduction in borrowing limits of the state. With high revenue deficits and reduction in borrowing limits, the overall liquidity of the state was impacted in fiscal 2024. The liquidity position of the State will remain key rating monitorable.

 

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 approved borrowing limit in fiscal 2024 is Rs 10,000 crore and KIIFB received sanction of Rs 5,000 crore (on gross basis). For fiscal 2024, borrowing has been lower than anticipated as the project disbursements have also been lower than planned. KIIFB had anticipated bulk payments towards certain infrastructure projects in fiscal 2024 that did not materialise and hence, borrowing requirements have been lower for the fiscal.

 

For fiscal 2025, 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 3,300 crore as corpus. Total liquidity available with KIIFB is of Rs 6,270 crore as of July 2024. Net cash inflow from MVT and cess collections, along with the available liquidity, will be adequate to meet debt obligation in fiscal 2025.

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 2025 because of high expenses and reduction in revenue deficit grants.

Rating sensitivity factors

Upward factors:

• Reduction in state government revenue deficit to below 0.5% of GSDP
• Steady decline in indebtedness (including guarantees)

 

Downward factors:

• Narrowing of credit buffer or non-adherence to the payment structure
• Increase in indebtedness to more than 41-42% on sustained basis.
• Significant deterioration in liquidity profile of the state

Unsupported ratings: CRISIL BBB

CRISIL Ratings has introduced the suffix CE for instruments having explicit credit enhancement feature in compliance with the SEBI 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 being shared shortly:

• Executed guarantee deed
• Term loan agreement

 

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.

About the Company

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.

List of covenants

Salient features of bank loans backed by state government guarantee

• Term loans have principal moratorium of two years, during which DSRA of two quarters of interest will be maintained for all lenders except one, wherein DSRA is created after the moratorium. Following the moratorium, there will be DSRA covering two quarters of interest and principal obligations for all the lenders.
• There is step-up allocation of the MVT and complete allocation of the petroleum cess to KIIFB under the KIIF Act. The cash flow will be prioritised for debt servicing.
• The DSRA will be replenished, if dipped into, by way of drawdown on MVT/petroleum cess receipts in the KIIFB designated receipt account.

Transaction structure:

Date	Particulars
T-6	KIIFB to maintain sufficient balance in the escrow account.
T-5	Lender shall monitor sufficiency of balance in the escrow account. If balance is inadequate, the DSRA will be dipped into. If the DSRA is utilised for payments, the shortfall should be replenished on priority by the borrower from the escrow account, which receives the inflow from GoKL pertaining to the borrower’s share of MVT and petroleum cess as per the KIIF Act.
T	Due date for the payment.
T+1	Invocation of guarantee through demand for payment notice. The guarantor shall make good the payment corresponding to the amount due to the lender within 30 days from the due date of payment (T+30).
T+29	If the guarantee is not invoked by the lender, the guarantor shall make good payment of the amount due to the lender within 30 days of the due date.
T+30	Deemed date of default.

 

Any other information: Not Applicable