Rating Rationale
November 24, 2017 | Mumbai
Uttar Pradesh Power Corporation Limited
'Provisional CRISIL A+(SO)/Stable' assigned to bond 
 
Rating Action
Rs.4500 Crore Bond Provisional CRISIL A+(SO)/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'Provisional CRISIL A+(SO)/Stable' rating to Rs.4500 crore Bond of Uttar Pradesh Power Corporation Limited (UPPCL). The Provisional rating will be converted after receiving the documents in line with the structure submitted to CRISIL.
 
The rating reflects the strength of an unconditional and irrevocable guarantee provided by the Government of Uttar Pradesh (GoUP), a trustee-administered escrow and payment mechanism for the bonds and presence of adequate liquidity in the form of debt service reserve account (DSRA). The rating also factors in GoUPs healthy revenue surplus and own tax buoyancy with its large economic base. The ratings are however constrained by its relatively high debt levels with moderate economic management and traction in power sector reforms which are yet to materialize, weak socio-economic parameters and below average financial performance of UPPCL.

The 'SO' suffix indicates a trustee-administered escrow mechanism with a well- defined T-structured guarantee trigger mechanism adequate liquidity buffer and a mechanism to trap the subsidy receipts to fill in the DSRA in case the same is utilized.

Analytical Approach

For arriving at the rating, CRISIL has applied its criteria on rating instruments backed by guarantees. In addition to the state guarantee, payment mechanism provides for an enhanced liquidity cushion through presence of DSRA and a subsidy trapping mechanism in case DSRA is utilized. This liquidity buffer mitigates the risk of delayed payment, if any from the state government and thereby lowers the risk for the instrument.

Key Rating Drivers & Detailed Description
Strengths
* Presence of an unconditional and irrevocable guarantee provided by GoUP, trustee-administered escrow and payment mechanism, and adequate liquidity
The issuance benefits from credit enhancement provided by a well-defined T-structured guarantee trigger mechanism, adequate liquidity buffer and a mechanism to trap the subsidy receipts to fill in the DSRA in case the same is utilized.
 
The primary cash-flows to be harnessed for bond servicing will come via escrow of electricity receivables, having a daily average collections of at-least Rs.10 crores. The standing instruction on this account will auto-sweep the pro-rated amounts on a daily basis, to a bond servicing account which would have a peak per day sweep of about Rs.4.90 crore. In the event of a shortfall in primary cashflows, the structure draws comfort from the legal recourse to the state government via a trustee monitored guarantee invocation framework.
 
In addition, the rating is further supported by the presence of a 2-quarter DSRA as a liquidity cushion, which lowers the risk of any delay in receipt of payment from the state government. In the event of DSRA utilisation, the structure provides for trapping of subsidy receipts which are a steady budgeted monthly inflow from the state of around Rs.330 crores and would first be used to top up the DSRA, well before the next payment cycle. CRISIL believes that this additional liquidity buffer provides additional strength to the payment structure and adequately provides protection from any administrative delays. However frequent utilization of DSRA, non-promptness in receipt of funds from the state government or non-compliance with the timelines of the T-structure by the Trustee, would continue to be key rating sensitivity factors.
 
* Amongst largest economy with healthy revenue surplus and own tax buoyancy
Uttar Pradesh (UP) has the 3rd largest Indian state in terms of Gross State Domestic Product (GSDP) with consistent revenue surpluses for the past 10 years, benefitting primarily due to high share in central tax devolutions (SICT) and healthy levels of state's own tax revenues (SOTR). UP because of its large population base gets the largest share of around 18%. Also being a consumption driven state, its revenues are also expected to benefit from collections under good and services tax (GST). Total revenue receipts are expected to increase by about 19% in fiscal 2018 partly on account of additional flows under the GST regime. The committed expenditure although elevated at 56% (in fiscal 2017) of revenue expenditure have been coming down over time indicating flexibility to curtail expenditures, if required. Consequently, state is expected to maintain healthy revenue surplus to revenue receipts of 4.5%-5%.
 
Weakness
* Weak socio-economic parameters
UP has relatively weak demographic and socio-economic positioning with low per capita income. The contribution from the secondary sector has a declining trend, with high dependency on primary sector. The state also has the 4th highest population density, low literacy and urbanization rates as well as the lowest number of households electrified. These low levels of social indices will necessitate considerable outlays by the state for eventual convergence to national average level, over a longer term.
 
* High leverage with moderate economic management
The leverage remains high with total debt plus guarantee to gross state domestic product (GSDP) at 32.7% in fiscal 2017 which is expected to be range bound over the medium term. Furthermore, provision for entire farm loan waiver of Rs.36,400 cr. and high committed expenditure driven by the implementation of 7th pay commission may reduce the fiscal space. While CRISIL expects government to curtail capital expenditure to maintain the gross fiscal deficit (GFD) to GSDP at about 3% in fiscal 2018, significant curtailments may impact future revenue potential.
 
States' power reforms have led to reduction in Aggregate Technical & Commercial (AT&C) losses, over the previous fiscal, however the initiatives are yet to fully catch up with the targets stipulated in the UDAY memorandum. State has also resorted to borrowings under the Ways and Means Advances to manage its liquidity, indicating moderate economic management. CRISIL expects the announcement of the industry policy, steps being taken to reform power sector and presence of same government at center and state will aid in synergies, and benefit the state over medium to long term. However, traction in improvements, leverage levels and continuation of high fiscal deficit will remain a key monitorable.
 
* Below average financial performance of UPPCL
The performance of UPPCL remains weak with EBIDTA level losses. The company, along with the state government, has undertaken a number of measures including regular monitoring of progress under UDAY, setting up of bijli thanes to tackle power theft, focusing on rural electrification and metering; benefits of which are yet to translate into improvement in company's financial position. CRISIL believes that power sector will continue to remain critical for the state Government and its deficits will be well supported through budgetary provisions. However significant leveraging to support future losses or delays in meeting other financial and commercial obligations or any change in Government's stance towards the sector will be key monitorables.
Outlook: Stable

CRISIL believes that UPPCL bonds will continue to benefit from its strong payment structure and support from GoUP over the medium to long term.
 
Upside scenario
* Sustained improvement in the power sector and reform orientation of the state
 
Downside scenario
* Significant adverse impact on GoUP's fiscal performance over the medium term.
* Decline of the liquidity buffers or non-adherence to the payment structure

About the Company

UPPCL was formed on January 14, 2000 by unbundling the Uttar Pradesh State Electricity Board (UP SEB) into three separate entities: UPPCL, holding the Transmission & Distribution business, Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited, which holds the Thermal Generation and, Uttar Pradesh Jal Vidyut Nigam Limited (UPJVNL), which holds Hydro Generation business The transmission business was subsequently carved out of UPPCL into an independent government company in 2007 called Uttar Pradesh Power Transmission Company Limited.
 
The 5 discoms under UPPCL include Dakshinanchal Vidyut Vitran Nigam Limited (DVVNL or the Agra Discom), Madhyanchal Vidyut Vitran Nigam Limited (MVVNL or the Lucknow Discom), Purvanchal Vidyut Vitran Nigam Limited (PVVNL or the Varanasi Discom), Paschimanchal Vidyut Vitran Nigam Limited (PaVVNL or the Meerut Discom) and Kanpur Electricity Supply Company (KESCO).

Key Financial Indicators- UPPCL Standalone:
Particulars Unit 2017* 2016*
Revenue Rs cr 43,422 37,308
Profit After Tax Rs cr -8,817 -15,387
PAT margin % -20.3 -41.2
Adjusted debt/Adjusted networth Times 6.58 7.71
Interest coverage Times NM NM
NM: Not meaningful
* Provisional
 
Government of Uttar Pradesh- reported financials:
Particulars Unit 2017 (RE) 2016 (Accounts)
Revenue Receipts Rs cr 269,407 227,075
Revenue Surplus Rs cr 24,506 14,340
Gross Fiscal Deficit Rs cr 55,021 58,475
GFD/GSDP % 4.4% 5.3%
Debt^/GSDP % 32.7% 34.5%
RR/Interest Times 9.8 10.6
^ including guarantees

Any other information
The 'provisional' rating will be converted to a 'final' rating on receipt of the following executed documents:

  • Debenture trustee agreement,
  • Debenture trust deed,
  • Deed of Guarantee
  • Default Escrow account agreement
  • Deed of Hypothecation
  • Accounts agreement
  • Debenture Trustee Awareness Letter
  • Representations and Warranties Letter

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale/report indicating conversion of the 'provisional' rating to 'final' rating will be published on the CRISIL website on receipt of the required documents.
 
Salient features of the bond backed by the State Government guarantee:

  • The NCD will have quarterly interest and repayments
  • The tenure will be for 10 years repayments commencing from the end of 7th quarter
  • Upfront creation of liquidity facility in the form of DSRA for next two-quarter of principal and interest payments (in the form of cash), additional DSRA augmentation within 15 days after end of 5th quarter to take care of enhanced servicing requirements.
  • Standing instruction from one collection account (or Designated Receipt Account) of the borrower having an average daily inflow of atleast Rs 10 cr. for daily transfer into the Bond Servicing Account.
  • This account will be free from any encumbrance or escrow towards any existing or future lenders or creditors.
  • Subsidy received from state government will be deposited in a separate account called Subsidy Receipt Account. This arrangement would be agreed upon with the state government. If DSRA is dipped into, the default escrow on this Subsidy Receipt Account will get activated and all funds received in this account would be trapped and first used to top up the DSRA.

Transaction Structure:
Assuming T is the bond issuance day and T1, T2 and T3 are subsequent bond payment dates, one quarter apart:

Date Particulars
From T1-90 to T1-15 UPPCL Bond Servicing account to be funded daily. The funds to be transferred in such a manner so that the entire servicing required in a quarter, are collected by T-15 days (i.e. in 75 days)
T1-14 Debenture Trustee will monitor the sufficiency of the balance
T1-14 to T1-10 Trustee will inform GoUP and Rating Agency of any shortfall. This would be a soft call on the guarantee.
T1-9 Trustee will ask GoUP to make good the shortfall as per terms of the guarantee by T-3 day. This will be a stronger call on the guarantee with a notice being sent by Trustee.
T1-2 If shortfall still persist then Trustee will transfer funds from DSRA into the UPPCL Bond Servicing account
T1 Meet the Bond payment
  If DSRA is utilized, it will trigger a default escrow on the Subsidy Receipt Account on next working day, by which the subsidy would start getting trapped till DSRA is not fully replenished.
T1+76 to T1+80
(or T2-14 to T2-10)		 Trustee will call upon GoUP to make good the entire shortfall i.e towards T1 and T2 payments. This would be a soft call on the guarantee.
T1+81
(or T2-9)		 Trustee will notify GoUP to make good the shortfall (including the amounts of any previous shortfalls) as per terms of the guarantee by T2-3 day. This will be a stronger call on the guarantee with a notice being sent by Trustee.
T1+88
(or T2-2)		 If shortfall still persist then Trustee will transfer funds from DSRA into the UPPCL Bond Servicing account
T1+89
(or T2-1)		 The Trustee will send a final notice to the state government stating its intention to invoke the guarantee within 10 days if the shortfall is not paid.
T2 Meet the Bond payment
T2+9 The Trustee will invoke the state guarantee to the extent of meeting the 2 quarter-DSRA shortfall
T3 Meet the Bond payment
After T3 If a payment default happens on T3, then one day after that, there will be an invocation of guarantee calling for acceleration on entire outstanding facility.
 
Any major change in the salient features or transaction structure in the final documents would be a rating sensitivity factor.
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Type of instrument Date of allotment Coupon
Rate (%)		 Maturity date Issue Size
(Rs cr)		 Rating Assigned with Outlook
NA Bond^ NA NA NA 4500 Provisional CRISIL A+(SO)/Stable
^Not yet placed
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  4500  Provisional CRISIL A+(SO)/Stable    --    --    --    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Approach to Financial Ratios
Criteria for rating instruments backed by guarantees
Rating Criteria for State Governments

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Jyoti Parmar
Media Relations
CRISIL Limited
D: +91 22 3342 1835
B: +91 22 3342 3000
 jyoti.parmar@crisil.com
Subodh Kumar Rai
Senior Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
subodh.rai@crisil.com

Manish Kumar Gupta
Director - CRISIL Ratings
CRISIL Limited
B:+91 124 672 2000
manish.gupta@crisil.com

Supa Ray
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 124 672 2113
Supa.Ray@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is an agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers.

We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.

For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK


About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY NOTICE

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the “Company) you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view the Company’s Customer Privacy at https://www.spglobal.com/privacy

Last updated: April 2016

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: http://www.crisil.com/ratings/highlightedpolicy.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL