Detailed Rationale

CRISIL Ratings has reaffirmed its 'Provisional CRISIL AA-/Stable' rating on the non-convertible debentures (NCDs) of Rajkot Municipal Corporation (RMC).

 

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). The payment mechanism for coupon and redemption is given in the annexure. The corporation is planning to issue bonds in the next 6-12 months.

 

The rating reflects the strong creditworthiness and low performance risk of the originator and high debt service coverage ratio (DSCR), leading to low impact of future flow on originators’ other obligations, additional security in the form of DSRA created before pay-in, presence of a payment structure and recourse to the originator. Linkage of the inflow to the performance of RMC is low, as the inflow is dependent on the taxes collected by the corporation. The expected high DSCR, coupled with stable inflow and low debt, will keep the financial risk profile comfortable. The NCD has a well-defined structure of escrow account, payment structure and points of recourse in case of shortfall in cash flow. RMC has not issued the aforementioned instrument to date and is expected to issue it in the coming months subject to execution of documents and fulfilment of other requirements mentioned in the rating rationale.

 

The rating also factors in the adequate financial risk profile of the corporation, backed by healthy operating surplus, which is expected to revert to Rs 50-60 crore over the medium term, continued support from the government in the form of grants and compensation, comfortable liquidity, favourable economic base and sound service arrangements. These strengths are partially offset by modest cost recovery for the services provided and low collection efficiency.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

• Strong escrow mechanism

The escrow and bond payment mechanism provides adequate strength to bond issuance. The tax receipts and user charges escrowed at collection, trustee-managed escrow mechanism and payment structure with recourse to the originator ensure sufficient safety for timely debt servicing for the investors. The creation of a DSRA equivalent to annual interest payment before pay-in and its maintenance throughout the tenure further enhance the strength of the structure. The DSCR is also expected to be high throughout the tenure of the instrument.

 

• Moderate operating performance

Revenue is expected to grow by double digits on a low base in the ongoing fiscal with pick-up in economic activity. Operating surplus is expected to revert to Rs 50-60 crore per annum. The corporation is expected to maintain moderate operating performance over the medium term, backed by stable property tax collections, steady receipt of grants from the state government in lieu of octroi and growth in non-tax income, primarily comprising fees and user charges, town development income and rental income.

 

RMC reported revenue income of Rs 634 crore for fiscal 2022, largely comprising its own revenue of nearly 75%, with the remaining derived from government grants. Revenue income grew over 15% year-on-year amid recovery on a low base in fiscal 2021. However, expenditure grew ~17%. This has led to an operating deficit of Rs 51 crore. Nevertheless, operating performance is gradually improving, as the corporation has collected Rs 126 crore in tax and around Rs 35 crore in octroi grants in the first quarter of the ongoing fiscal.

 

• Comfortable financial risk profile

The healthy financial risk profile is reflected in above-average debt protection metrics, strong liquidity and minimal debt. The corporation is expected to fund its capital expenditure (capex) largely through internal accrual and grants. It had outstanding debt of over Rs 3 crore as on March 31, 2022.

 

RMC has also availed of a short-tenure loan facility of Rs 200 crore, of which currently ~Rs 50 crore is being utilised. Cash and equivalent of Rs 535 crore as on June 30, 2022, including the current accounts, support liquidity. Regular receipt of octroi compensation and capital grants from the state government will be a key monitorable.

 

• Healthy economic base and moderate service levels

Rajkot is well known for its casting and forging industries and has around 500 foundry units. The city plays an important role in the complex supply chains of many global engineering companies that make electric motors, automobiles, machine tools, bearings and shafts. Rajkot is also famous for its jewellery market, silk embroidery and watch parts.

 

Service arrangements are characterised by 100% coverage of water supply, 87% coverage of sewerage and 100% coverage of solid waste management.

 

Weaknesses:

• Low collection efficiency of taxes and average cost recovery for services

The collection efficiency of property tax was average at around 50%, while overall collection efficiency was low at 30% in fiscal 2022. Furthermore, cost recovery for maintenance of water supply is low at 24%, though there is 100% cost recovery for sewerage maintenance. Implementation of new projects is expected to drive improvement in service-level arrangements and result in increased collection of taxes and charges.

 

• Large capex requirement and high dependence on the state government

RMC has planned large capex of around Rs 700 crore over the medium term; operating surplus is projected at Rs 50-60 crore per annum. The capex is expected to be funded largely through grants, in line with the past, and partly through the surplus available with the corporation. However, with relatively low operating surplus, ability of the corporation to execute capital projects remains limited and depends largely on receipts of grants.

 

Furthermore, after abolishment of octroi, the state government has been compensating the corporation for loss of revenue. The compensation contributed to around 27% of the total revenue receipts in fiscal 2022. Hence, RMC will continue to depend on compensation from the state government for its regular operating expenses.

Liquidity: Strong

Total cash and bank balance available with the corporation was Rs 535 crore as on June 30, 2022. Operating surplus is expected at Rs 50-60 crore against debt obligation of Rs 25-45 crore over the next two fiscals (including the sinking fund contribution). RMC is likely to maintain its healthy liquidity and continue to generate operating surplus, which will be sufficient to meet its debt obligation and fund its portion of the capex.

Outlook: Stable

The corporation will maintain its comfortable financial risk profile, supported by recovery in operating performance and stable liquidity.

Rating Sensitivity factors

Upward factors

• Steady increase in revenue receipts and operating surplus of over 15% of revenue receipts
• Improvement in collection efficiency and cost recovery of services

 

Downward factors

• Sustained steep fall in revenue or large, debt-funded capex weakening the financial risk profile, with operating surplus to debt ratio of below 0.2 time
• Irregularity or decline in receipt of grants from the state government
• Any adverse change in the payment structure 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:

• Debenture trust deed
• Debenture trustee appointment agreement
• Escrow agreement
• Final representation and warranties letter
• Final debenture trustee consent letter
• Final debenture trustee awareness letter
• Final term sheet

 

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale/report indicating conversion of the 'provisional' rating into a '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 A’.

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

RMC is governed by the Bombay Provincial Municipal Corporation Act, 1949, as amended by the Government of Gujarat. It covers an area of 161 square kilometres and has a population of 1.4 million. The corporation is responsible for providing basic civic services, such as water supply, sewerage management and solid waste management. It has an elected body, with the municipal commissioner as the administrative head.

Key Financial Indicators

As on / for the period ended March 31	Units	2022	2021
Revenue receipts	Rs crore	634	558
Revenue surplus	Rs crore	-51	-36
Operating surplus/revenue receipts	%	-8%	-7%

 

Any other information:

Annexure

Broad contours of the escrow structure pertaining to the current Rs 150 crore NCD issue are as follows:

• All funds whether on account of tax revenue and fees and user charges or any other specified revenue/cash flow deposited in the account(s) where tax revenue and fees and user charges shall be collected (collection accounts(s)) and shall be transferred to a separate no-lien escrow account for debt servicing. This transfer is done on daily basis except on the last business day of every month.
• Eligible bond holders and lenders shall have first and pari passu charge over the escrow account collections.
• The funds lying in the escrow account shall be used to meet minimum balance in escrow account. The surplus funds after meeting the minimum balance can thereafter be transferred to RMC daily. The funds should be first utilised to accumulate the minimum balance in the escrow account. The surplus funds after meeting the minimum balance can be transferred to RMC HO account.
• Monthly contribution to be transferred from the escrow account to IPA (interest payment account) shall be calculated separately for each bond/NCD/loan facility as per the terms of the said issuance/facility.
• RMC shall open the following accounts for servicing the interest and principal of the proposed bonds for the exclusive benefit of the bond holders:
  • Interest payment account – Series I (“IPA - I”)
  • Sinking fund account – Series I (“SFA - I”)
• The IPA – I shall be funded one day before the pay-in date with an amount equal to annual interest payments for bonds referred as DSRA amount.
• At the end of every month, the funds lying/deposited in escrow account shall be used in the following priority:
  • Firstly, to transfer funds to respective accounts created for servicing of each loan/bonds
  • Secondly, an amount equal to interest payment for one month to be transferred to IPA account along with any further interest payable (by whatsoever name called) as per the terms of the issuance and any shortfall in earlier contribution shall be transferred to the IPA
  • At the end of each month, an amount equal to one month equivalent of the redemption amount to be transferred to SFA, and any shortfall in earlier contribution shall be transferred to the sinking fund account.
  • Any shortfall in the above account(s) shall be made good by RMC by transfer from other account(s) of RMC.
• The amount deposited in interest payment account and sinking fund shall be used solely for meeting the dues to the bondholders.
• No amount can be withdrawn from these accounts without the approval of Trustees to the bond holders.

 

Interest payment mechanism

T - Interest payment date

Day
T-25	The trustees shall check the amount lying to the credit of IPA. In case of any shortfall in amount, the trustees shall intimate RMC
T-15	RMC shall make good the shortfall in the IPA, if applicable
T-14	In case of shortfall, trustee shall trigger the payment mechanism and instruct bank to transfer the shortfall amount
T-10	Bank shall transfer the shortfall amount from IPA, if applicable
T	Interest payment is done

*Any amount drawn from the DSRA should be deposited back in the account

 

Redemption mechanism
T - Redemption date

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

 

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	Non-Convertible debentures*	NA	NA	NA	150	Simple	Provisional CRISIL AA-/Stable

*Yet to be issued