Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL A(CE)/Negative’ rating on the bond programmes of Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO).

 

The rating is driven by the unconditional and irrevocable guarantee provided to TANGEDCO by the Government of Tamil Nadu (GoTN), and the trustee-administered payment structure and mechanism for the bonds. The rating on the bonds, therefore, reflects the credit risk profile of GoTN.

 

The GoTN has a strong economic structure with favourable gross state domestic product (GSDP) composition and solid socio-economic indicators. Healthy liquidity management also supports the credit risk profile of the state. These strengths are partially offset by the state government’s average fiscal position owing to widening revenue deficit (RD), which continues to constrain capital outlays in the State, and the weak position of the power sector. Sustained widening of RD coupled with more-than-estimated increase in leveraging may result in a rating downgrade.

Analytical Approach

The rating on the non-convertible debentures to be issued by TANGEDCO factors in the guarantee extended by the GoTN.

Key Rating Drivers & Detailed Description

Strengths

Favourable GSDP composition

The GSDP composition of Tamil Nadu compares favourably with the national gross domestic product (GDP) composition as well as with the GSDP of other states rated by CRISIL Ratings. For fiscal 2022, Tamil Nadu derived 33% and 54% from the secondary and tertiary sectors, respectively. With the primary sector accounting for only about 13% of the state GSDP, which is below the national average of about 20%, Tamil Nadu has relatively lower dependence on agriculture. Strong secondary and tertiary sectors should lead to continuous improvement in the state revenue.

 

Strong socio-economic indicators

The socio-economic indicators of the state are superior to the national average and to those of other large CRISIL Ratings-rated states. The state’ urbanisation, as defined by the percentage of urban population in a state, is at 48% (2011 census), which is higher than the national average of 31%[1]. Its per capita income for fiscal 2022, at current prices, was Rs 241,131, which showed a 13.6% growth from the previous fiscal and compares well with the all-India average of Rs 2,16,495[2].

 

The state’s literacy rate of 80% (2011 census) is better than the national average of 74%. Similarly, its sex ratio of 995 females per 1,000 males (2011 census) is better than the national average of 940 females. Its infant mortality rate reduced to 15 deaths per 1,000 births in 2019 against the national average of 30[3]. A balanced economic structure with a well-developed demographic profile is a testimony to the state’s superior socio-economic infrastructure and augurs well for its future economic growth.

 

Presence of guarantee from the GoTN and strong payment structure

The rating reflects the unconditional and irrevocable guarantee provided to TANGEDCO by the GoTN and payment mechanism for the proposed bonds. The payment mechanism is supported by a well-defined T-structured guarantee trigger mechanism and an independent-trustee monitoring mechanism. As per the mechanism, TANGEDCO is required to fund the escrow account 45 days prior to the payment date. In the event of a shortfall, the trustee will intimate GoTN (in case TANGEDCO fails to do the same) 40 days before the payment date. In the event of GoTN failing to transfer clear funds in the escrow account to make up the shortfall by 5 working days before the payment date, the trustee shall forthwith invoke the guarantee issued by GoTN and inform CRISIL Ratings about the same. On invocation of the guarantee, GoTN must promptly deposit clear funds, to the extent of the shortfall, into the escrow account before three working days prior to the due date (T-3).

 

CRISIL Ratings also understands that the GoTN shall continue to make all the payments under the guarantee even if insolvency resolution process, liquidation order, winding up, amalgamation, dissolution or any other legal proceedings related to insolvency or liquidation are initiated against TANGEDCO under the provisions of Insolvency and Bankruptcy Code 2016 and Companies Act, 2013.

 

Weaknesses

Average fiscal position

Financial risk profile has moderated with strain, primarily because of high RDs. The RD/revenue receipts (RRs) ratio was high at 15.7% in fiscal 2022[4] (31.1% in fiscal 2021) compared with 13.5% in fiscal 2019. In fiscals 2019-2022, RRs registered a compound annual growth rate (CAGR) of 7.2%, lower than CAGR of 7.9% in revenue expenditure (RE) during the said period, resulting in continued high RD levels. The increase in RE is mainly driven by high committed expenditure, which includes salaries, interest and pensions that account for more than half of the revenue expenditure and stood at around 47% in fiscal 2022.

 

The RD declined in fiscal 2022 as revenue receipts saw robust growth. This also led to maintaining capital outlay at 1.8% of GSDP. With absence of GST compensation from July 2022 onwards, widening of RD remains a key monitorable. Widening of RD will impact the quality of expenditure, with capital expenditure getting squeezed. The gross fiscal deficit (GFD)/GSDP was 3.3% in fiscal 2022, lower than 4.9% in fiscal 2021. Indebtedness[5] remained elevated at 34.2% in fiscal 2021. The continued high deficit and moderately high indebtedness may adversely impact the fiscal position and constrain the overall credit profile.

Even as fiscal 2022 saw recovery, continued growth in revenue receipts with controlled revenue expenditure will remain key monitorable

 

High levels of committed expenditure

Expenditure profile carries high levels of committed expenditure, including pension, salary and interest payments. The state government expenses on these heads is around 47% of its overall revenue expenditure in fiscal 2022. This will continue to impact financial flexibility over the medium term.

 

Moderate economic management

The weak position of the state power sector moderates its economic management. The gap between average cost of supply and average revenue realised (ACS-ARR) remained high at Rs 1.23 per unit in fiscal 2022, though slightly better than Rs 1.49 per unit in fiscal 2021. The elevated ACS-ARR gap is primarily because of no revision in tariff since fiscal 2017. Following the implementation of Ujwal DISCOM Assurance Yojana, aggregate technical and commercial (AT&C) losses reduced to 12.09% in fiscal 2021 from 15.08% in fiscal 2019. Also, Tamil Nadu Electricity Regulatory Commission (TNERC) has issued revised tariff order which is effective from September 10, 2022. This is expected to help reduce ACS-ARR gap and provide pathway for reaching breakeven. The ACS-ARR gap will remain a key monitorable.

[1] http://censusindia.gov.in/

[2] http://mospi.gov.in/

[3] https://www.indiabudget.gov.in/economicsurvey/

[4] Provisional financials for fiscal 2022 (source: CAG)

[5] Indebtedness = (Market borrowings + loans from centre + public debt + guarantees) / state GDP.

Liquidity: Adequate

The state manages its liquidity well and has not used ways and means advances since 2004. In addition, it has substantial headroom at the net borrowing level, which also supports overall liquidity. On account of continued losses incurred by the company, the standalone liquidity of TANGEDCO remains weak. However, support from GoTN in the form of subsidies and access to finance from non-banking finance companies because of its critical utility role and the state government ownership should comfort liquidity.

Outlook: Negative

Fiscal position may get strained over the medium term on account of widening revenue deficits.

Rating Sensitivity Factors

Upward factors

• Sustained decline in RDs supported by higher tax collections, and reduction in non-developmental expenses
• Improvement in growth-oriented capital outlay boosting the overall GSDP growth rate of the state
• Reduction in debt levels, including guarantees, to 25-30% of the GSDP over the medium term

 

Downward factors

• Sustained increase in RDs because of lower-than-expected recoveries in revenue collections, resulting in increase in fiscal deficits on a sustained basis
• Significant reduction in capital outlay in the state
• Any instance of release of funds in the escrow account after T-5 working days
• Non-compliance with the structure outlined

Adequacy of credit enhancement structure

The guarantee provided by GoTN is unconditional, irrevocable and remains a contingent liability for the GoTN. A trustee-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligations.

Unsupported ratings: CRISIL BB

CRISIL Ratings has introduced a 'CE' suffix for instruments having an explicit credit enhancement feature in compliance with the circular from the Securities and Exchange Board of India dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the business and financial risk profiles of TANGEDCO. The business risk profile continues to be strong owing to monopoly in the power distribution business in the designated service area and TANGEDCO’s critical role to the state economy as it provides power to various agricultural centres. However, the ACS-ARR gap has remained wide on account of no revision in tariff since 2017, leading to high dependence on subsidy from the state government. The financial risk profile, however, remains weak because of a highly leveraged capital structure and high losses.

 

However, TANGEDCO continues to receive timely subsidy from the state government. AT&C losses have improved over the years because of investments done to reduce distribution losses. Also, implementation of the tariff hike (effective September 10, 2022) approved by TNERC is expected to reduce losses over the medium term.

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:

 

• Corporate guarantee deed
• Default escrow agreement
• TANGEDCO account agreements
• Hypothecation agreement
• Term sheet
• Debenture trustee agreement
• Representation and warranties

 

The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed and/or confirmations on completion of pending steps within 90 days from the date of issuance of the instrument. The final rating assigned post conversion shall be consistent with the available documents or completed steps, as applicable. In case of non-completion of steps or 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 pending steps/documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL BB/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 Issuer

Tamil Nadu Electricity Board (TNEB), formed in July 1957, was in the business of power generation, transmission and distribution in Tamil Nadu. With effect from November 1, 2010, TNEB has been restructured into three companies: TNEB Ltd, the holding company, and its two subsidiaries, TANGEDCO for generation and distribution activities and Tamil Nadu Transmission Corporation Ltd for transmission of electricity and grid operations. TANGEDCO is under the administrative control of the energy department of GoTN.

Key Financial Indicators: GoTN - (Reported financials)

Particulars	Unit	2022#	2021
Revenue receipts*	Rs crore	2,13,989	1,80,317
Revenue deficit	Rs crore	33,591	56,085
Gross fiscal deficit	Rs crore	68,198	87,742
GFD/GSDP	%	3.3	4.9
Debt*+ guarantees/GSDP	%	35.5	34.6
RR/interest	Times	5.5	4.9

*CRISIL adjusted

#CAG Provisionals

List of covenants:

Key features of the tripartite agreement between TANGEDCO (issuer), GoTN (guarantor) and trustee for ensuring timely repayment of dues to the bondholders will be as follows:

 

•                  At least 45 calendar days prior to the forthcoming due date for interest and/or principal (T-45). TANGEDCO shall:

1.                 Credit the requisite funds in the escrow account/trust and retention account (TRA) for servicing the bondholders on the forthcoming due date ‘T’ or put them in a fixed deposit (FD) with a designated bank and ensure that the FDs are liened to the trustee.
2.                 Ensure GoTN and the trustee are intimated about the clear fund balance in the TRA.

 

•                  In case TANGEDCO does not deposit the funds into the escrow account, TANGEDCO shall communicate in writing, at least 45 calendar days prior to the forthcoming due date (T-45), to the finance secretary and/or designated official in GoTN with a copy to the trustee and CRISIL Ratings:

1.                 The forthcoming due date ‘T’
2.                 The amount payable to the bondholders as interest and/or principal on the said due date ‘T’

 

TANGEDCO shall also request GoTN to ensure adequate clear funds are available in the escrow account for servicing obligation on the bonds on due date ‘T’.

 

•                  In case TANGEDCO fails to intimate GoTN as required by points 1 and 2 above, the trustee shall intimate GoTN at least 40 calendar days prior to forthcoming due date (T-40)

 

•                  At least five working days prior to the due date (T-5), the trustee shall ensure the following:
  1.                 Proceeds from maturity of FDs are transferred to TRA
  2.                 The interest and/or principal payment cheques are dispatched to the bondholders by latest T-5 working days
  3.                 In the event of GoTN failing to transfer clear funds in the escrow account to make up the shortfall by T-5 working days, the trustee shall forthwith invoke the guarantee issued by GoTN and inform CRISIL Ratings about the same

 

•                  On invocation of the guarantee, GoTN must promptly deposit clear funds, to the extent of the shortfall, into the escrow account, before three working days prior to the due date (T-3).

 

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 Level	Rating Assigned  with Outlook
NA	Bonds*	NA	NA	NA	7605	Complex	Provisional CRISIL A(CE)/Negative

*Yet to be issued