Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-(CE)/Stable' rating on Rs 2,200 crore proposed long-term bank facility Mumbai Metro Rail Corporation Ltd (MMRCL). This facility, which was expected to be availed from the identified lender was not used and instead MMRCL has availed Rs 2,200 crore facility from Power Finance Corporation.

 

CRISIL Ratings has reaffirmed and also extended its ‘Provisional AA-(CE)/Stable' rating’ on Rs 1,000 crore loan facility by 90 days. As per the details provided to CRISIL Ratings at the time of assigning the rating on July 11, 2023, the Rs 1000 crore loan facility was to be backed by letter of comfort (LoC) to be provided by the Government of Maharashtra (GoMH). However, the GoMH has issued a Government resolution to provide guarantee for the facility which has also been availed by the company. This, however, is not as per the guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities. However, the management has articulated its intention to amend the guarantee deed to incorporate the requisite clauses. The rating may be migrated to unsupported ratings, in case the final documentation is not received or does not comply with the principles for evaluating the strength of the guarantee as per CRISIL Ratings criteria within specified timelines.

 

The rating factors in the LoC provided by the Government of Maharashtra (GoMH) for the rated facilities of MMRCL.

 

The GoMH has healthy economic management with comfortable financial risk profile and largest economy in terms of GSDP (gross state domestic product), led by a robust tertiary sector. These strengths are partially offset by the modest socio-economic indicators of the state.

Analytical Approach

CRISIL Ratings has applied its criteria for rating instruments backed by LoC and guarantees.

Key Rating Drivers & Detailed Description

Strengths:

Strength of unconditional and irrevocable LoC provided by GoMH for Rs 2,200 crore facility:

GoMH has given a LoC for the Rs 2,200 crore proposed bank loan facility. According to the payment mechanism, MMRCL will, at all points of time, keep sufficient unutilised bank limit during the entire tenor of the facility so that the interest payment will be funded through the facility itself. Servicing of the principal obligation will be in the form of bullet repayment within 15 months from the first disbursement date or repayment via Japan International Cooperation Agency (JICA) loan tranche 4 whichever is earlier. JICA has already provided an ‘in principle’ approval, and final disbursement is subject to approval of revised project cost from the Government of India, and project appraisal and approval by JICA and the Government of Japan. The JICA facility approval was previously expected by June 2023. However, the final approval from Government of India is still awaited on the revised DPR (detailed project report) and accordingly the JICA facility is now expected to be disbursed in the next 6 months. The revised DRP has been approved by PIB (public investment board) and is awaiting further clearance.

 

However, in case of delay in receipt in funds from JICA, MMRCL will intimate GoMH 30 days in advance of the bullet principal servicing date. GoMH is to credit the loan account 3 days prior to the due date. Any change in the transaction structure and its compliance will be rating sensitivity factors.

As per the details provided to CRISIL Ratings at the time of assigning the rating on July 11, 2023, the Rs 1,000 crore loan facility was to be backed by letter of comfort (LoC) provided by the Government of Maharashtra (GoMH). However, the GoMH has issued a Government resolution to provide guarantee for the facility which has also been availed by the company. This, however, is not as per the guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities. However, the management has articulated its intention to amend the guarantee deed to incorporate the requisite clauses. The rating may be migrated to unsupported ratings, in case the final documentation is not received or does not comply with the principles for evaluating the strength of the guarantee as per CRISIL Ratings criteria within specified timelines.

 

Prudent economic management of the state:

The robust tertiary sector accounts for around 60% of GSDP, against all-India average of 55%. This is supported by Mumbai’s position as the financial capital of India and the main driver of economic growth in Maharashtra. Nominal GSDP registered a healthy compound annual growth rate of around 7% over fiscals 2017 to 2022. The growth trajectory was, however, lower than India’s growth over the same period.

 

Comfortable financial risk profile of GoMH:

Maharashtra is self-reliant in revenue sources with own tax and non-tax revenue contributing ~74% to overall income. The state also has prudent expenditure measures in places, as reflected in revenue deficits to revenue receipts of (0.4)% in fiscal 2023 (CAG estimates).

 

The state has consistently remained below the 25% debt/GSDP limit recommended under Fiscal Responsibility and Budget Management (FRBM) with modest capital expenditure being undertaken. The gross fiscal deficit (GFD) as a percentage of GSDP was 1.9% for fiscal 2023 (1.7% in fiscal 2022). The debt-plus-guarantees-to-GSDP ratio has remained at 20.7% in fiscal 2023 and fiscal 2022. GoMH has maintained GFD/GSDP below 3% limit every fiscal since 2007 (as recommended under FRBM) despite pandemic pressures.

 

Indebtedness is expected to remain stable over the medium term. Borrowings are mainly to fund capital outlays and guarantees provided by the state government, one of the lowest among Indian states. The Maharashtra government is committed to ensuring fiscal discipline through conservative spending plans.

 

Strategic importance of MMRCL to the state government:

MMRCL is strategically important as it folds into the larger focus of GoMH on developing urban infrastructure. This project will provide various benefits to Mumbai, such as better and safer transport services, lower traffic density on the roads, savings in vehicle operating costs, lower requirement for expansion and maintenance of the road network, reduced air pollution and noise levels. This metro line will connect the economically important hotspots of Mumbai that are not directly catered to by the suburban railway network.

 

Weaknesses:

Modest socio-economic indicators

Literacy rate in Maharashtra is 80% (national average is 74%); 17% of the population lives below poverty line (national average is 22%); and the Human Development Index rank is 15 among Indian states. This would necessitate higher social sector expenditure to improve social parameters.

 

Delays in project progress poses implementation and funding risks

The tentative deadline for project completion was between 2016 and 2022, which was missed due to several legal disputes. The project is now expected to be completed in 2024. The primary dispute was regarding the stay on construction of the metro car shed, Aarey, due to environmental concerns. However, on July 27, 2022, GoMH intimated MMRCL that the stay has been lifted and instructed it to complete the depot work in a timely manner. The construction is contingent on the Supreme Court prohibition of cutting more tress at Aarey, which MMRCL has agreed to comply with.

 

Due to prolonged delays, funding received based on initial cost estimates has been fully exhausted. Consequently, the project cost has been revised to Rs 37,276 crore from the earlier estimates of Rs 23,942 crore. Revised estimates have been approved by GoMH and is currently pending approval from the central government.

 

Timely implementation is key in any large capital-intensive public transport project. As of May 31, 2023, the overall physical progress for the project was around 82% and financial progress was around 66% of the revised cost estimates.

Liquidity: Strong

The liquidity of MMRCL is driven by state government support. There is ~Rs 100 crore of principal obligations further due in fiscal 2024. The Maharashtra government is expected to ensure sufficient funds are available as per the structure for principal repayment, in the event disbursement of funds from JICA is delayed.

Outlook: Stable

The GoMH will maintain its healthy economic management and strong financial risk profile over the medium term.

Rating Sensitivity Factors

Upward Factors

• Strengthening of the state socio-economic indicators
• Improvement in the credit risk profile of the state; for instance, indebtedness below 20% of GSDP or state operating with revenue surplus on a sustained basis

 

Downward Factors

• Non-adherence to the agreed payment structure
• Any significant delay in receipt of funds from JICA and the sponsors beyond expected timeline, or any change in support philosophy of the sponsors within the tenure of the facility
• Downward trend in the credit risk profile of the state; for instance, indebtedness rising above 28-30% of GSDP on a sustained basis

Adequacy of credit enhancement structure

The rating on the proposed bank facility reflects the unconditional and irrevocable draft LoC issued from GoMH. According to the payment mechanism, GoMH will timely service any amount due and payable in relation to the letter of credit facility. The total rated facility of MMRCL where LoC is provided by GoMH is not significant as compared to revenues of GoMH. CRISIL Ratings believes that GoMH will service the debt where LoC is provided in a timely manner even under a situation where cash flows of the borrower may not be adequate for debt servicing.

Unsupported ratings: CRISIL BBB+

CRISIL Ratings has introduced the 'CE' suffix for instruments having an 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 strategic importance of MMRCL to GoMH as it folds into the state’s larger focus on developing urban infrastructure in MMR and is expected to be a priority for the incumbent Maharashtra government. However, the project has already faced multiple years of delay due to legal disputes, leading to significant cost overruns. Successful execution of the project is contingent upon timely availability of funds from the sponsors and JICA.

Additional disclosures for the provisional rating

The provisional rating is contingent upon occurrence of the following steps or execution of the following documents, as applicable:

• Guarantee documentation as required

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending steps/ documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL BBB+/Stable’

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 Company

MMRCL is a special purpose vehicle with 50:50 participation from the Government of India and GoMH, appointed as the nodal agency to implement the project of underground section of the Mumbai Metro Line 3 of Mumbai’s mass rapid transit system.

List of covenants

The Rs 2,200 crore facility will be backed by ‘Letter of Comfort’ from the State of Maharashtra. GoMH will lend unconditional and irrevocable support to the company and undertake to make funds available, if required, to ensure timely payment of interest and repayment of the entire principal.

 

The Rs 1,000 crore facility will be backed by Guaranatee from the State of Maharashtra. GoMH has issued a Government resolution to provide guarantee for the facility which has also been availed by the company. This, however, is not as per the guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities. However, the management has articulated its intention to amend the guarantee deed to incorporate the requisite clauses.

Any other information: Not applicable