Credit Rating-PoolFin-Bond for ULBs
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Credit ratings, municipal bonds, and pooled finance can help municipalities mobilize resources. Credit rating agencies assess factors like legal framework, finances, operations, and specific projects to assign ratings. Ratings indicate varying levels of risk. Several Indian cities have issued municipal bonds. SEBI guidelines regulate bond issuance, requiring credit ratings, listing, disclosure, and escrow accounts. Pooled finance allows smaller municipalities to jointly borrow through special purpose vehicles with credit enhancement. Successful examples include the Tamil Nadu and Karnataka funds.
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Credit Rating-PoolFin-Bond for ULBs
- 1. Regional Centre for Urban & Environmental Studies, Lucknow Credit Rating, Municipal Bonds and Pooled Finance for Municipal Resource Mobilisation Madhusudan Sharma
- 2. Resource Mobilisation • Credit Rating • Municipal Bonds • Pooled Finance
- 3. SEBI approved Credit Rating Agencies • CRISIL Limited • Fitch Ratings India Private Ltd. ICRA Limited • Credit Analysis & Research Ltd. (CARE) • Brickwork Ratings India Private Limited • SME Rating Agency of India Ltd. (SMERA)
- 4. Assessment factors • Legal and Administrative framework Taxing powers, State grants, Minimum and maximum tax rates, user charges that can be levied, Borrowing powers • Economic base of service area Population base, growth rate, taxpaying capacity, Level of industrial and commercial activity, • Municipal finances Over all surplus/deficit, Revenue receipts, tax- base, Revenue and capital expenditure, Debt
- 5. Assessment factors-2 • Existing Operations • Managerial Assessment Systems and Procedures, Level of computerisation, Project Management Capabilities, Political Environment, Initiatives taken for enhancing resources • Project specific issues Tenure and funding, debt servicing requirement, Revenue, Service improvement
- 6. Rating Scale Rating Symbol Safety Rating definition for Long-Term Debt Instruments AAA Highest Safety Highest credit quality. Lowest expectation of default risk. Highest degree of safety regarding timely servicing of financial obligations. AA High Safety Very high credit quality. High degree of safety. Very low credit risk. A Adequate Safety High credit quality. Adequate degree of safety. Low credit risk.
- 7. Rating Scale-2 BBB Moderate Safety Good credit quality. Moderate degree of safety. Moderate credit risk. BB Moderate Risk Speculative, Moderate risk of default. B High Risk Highly speculative, High risk of default. C Very High Risk Substantial credit risk. Very high risk of default
- 8. Rating Scale-3 D Default In default or are expected to be in default soon. + / - '+' (plus) or '-' (minus) signs reflect comparative standing within the category. Credit Rating Agency’s first name as prefix to symbol – Crisil AAA, ICRA AA, SEBI Standardised Rating symbols and Definitions in 2011
- 9. Municipal Bonds • Ahmedabad first to receive Credit rating in February 1996 • Bangalore first Municipal Corporation to issue Bonds in 1997 • Bonds issued by Ludhiana, Nashik, Indore, Nagpur, Madurai, Visakhapatnam, Hyderabad, Chennai etc. • Bonds - Tax Free or Taxable
- 10. Municipal Bond Issue Regulation • SEBI issued Guidelines for Municipal Bond Issue on 15th July 2015 • Municipalities can issue only Revenue bonds serviced by revenues from one or more projects • Eligibility criteria defined • Prescribed conditions to be complied with before issuing bonds
- 11. Eligibility Criteria for Municipalities • Authorised to raise funds under its constitution • Accounts prepared as per NMAM or State MAM for at least 3 preceding years • Positive net worth in 3 preceding years • No default in repayment of debt during last 365 days • No order of restraint, prohibition or debarment by SEBI in force against the entity or its directors • Not named in the list of the wilful defaulters published by the RBI
- 12. General Conditions • Application to one or more recognised stock exchanges for listing of bonds and in-principle approval from the stock exchanges • Credit rating from at least one rating agency* • Minimum investment grade rating ('BBB-' and above) • Disclosure of unaccepted credit rating • Arrangement with depository* for dematerialisation of the proposed bonds *SEBI registered
- 13. General Conditions-2 • Bond tenure - minimum 3 years, maximum 30 years • Appoint one or more merchant bankers* • Create a separate escrow account for servicing of bonds with earmarked revenue. • Appoint a monitoring agency to monitor the earmarked revenue in the escrow account • In case of corporate municipal entity - appoint a debenture trustee* *SEBI registered
- 14. Pooled Finance • Huge Fund requirement for Urban Infrastructure • Weak Financial position of small ULBs • Not able to borrow from Capital market • FIRE-D project developed SPV • Small ULBs forming a Fund-one borrowing umbrella • Credit enhancement mechanism • Tamil Nadu and Karnataka success stories
- 15. Tamil Nadu Urban Development Fund (TNUDF) • SPV for Commercially viable water and sewerage projects • First in India in 2003 for 14 municipalities • Rs.30 crore bond issue @ 9.20% for 15 years • Multi-layered credit enhancement mechanism • USAID under FIRE-D project guaranteed 50% principal • Escrow account to set apart monthly payments • Strong collection of user charges • Fixed upfront contribution from citizens • Funds Rs. 1500 crore, Projects worth Rs. 6000 crore • 100% debt collection over last 9 years
- 16. Karnataka Water and Sanitation Pooled Fund • In 2005 SPV for Bangalore and surrounding 8 Municipalities • For Greater Bangalore water supply project of Rs. 600 crore • Rs.100 crore tax free bond issue @ 5.95% for 15 years • USAID under FIRE-D project guaranteed 50% principal • Escrow account to set apart monthly payments
- 17. Thanks