India Ratings Announces First Bond Rating on Metro Rail Project in India

By Accommodation Times News Service

India Ratings & Research (Ind-Ra) has rated the first bond transaction of metro rail project in India. Ind-Ra has rated Bangalore Metro Rail Corporation Limited’s (BMRCL) proposed bonds at ‘IND AA(exp)’.

Ind-Ra observes urban infrastructure improvement as one of the focus areas of the central government. The central government is providing support to the states and urban local bodies (ULBs) to improve urban infrastructure. Government of India’s (GoI) Jawaharlal Nehru National Urban Renewal Mission (JNNURM) aimed to improve urban infrastructure (water supply, sewerage, drainage, etc.).

The government intends to improve the quality of the country’s public transportation system by migrating people from using personal cars to public transportation. The government’s new transportation policy aims to tackle this through a multi-pronged strategy.

Over FY10-FY13, the central government released INR175.24bn to eight states for metro projects and INR29.7bn to 28 states and three union territories for urban transport projects. Simultaneously, GoI also availed overseas development assistance from the government of Japan (from Japan International Co-operation Agency; JICA) to implement metro rail projects. These funds were released as pass through assistance worth INR629.47 for metro rails in six states and 64.54bn Japanese yen for the Bangalore metro rail project.

While rating BMRCL’s debt, Ind-Ra looked at the memorandum of understanding entered into by the equity holders and developers – GoI, government of Karnataka (GoK) and BMRCL. The agreement very lucidly defines the responsibilities of the two sponsors – GoI and GoK. Any cost overruns on the project will be borne by both the sponsors, the proportion of which will be decided by a committee consisting of central and state civil servants.

Both the sponsors have committed equal equity in BMRCL. However, as on 30 March 2013, GoK had injected INR17.10bn equity, more than the committed amount (INR16.35bn). Both the sponsors have given interest-free sub-debt for the project. The amount of the sub-debt given by the GoK (INR22.69bn) is more than that proposed and higher than the sub-debt given by GoI (INR4.57bn). GoI’s support for the project emanates from guaranteeing the JICA and AFD loan for the project. Thus, GoI is exposed to foreign exchange risks through JICA and AFD loan.

Additional commitment by GoK to BMRCL is in the form of timely funding of shadow cash support account covering all senior debt service to avoid default. Ind-Ra has applied its ‘Rating of Public Sector Entities’ criteria to arrive at a rating of BMRCL’s proposed bond issue. The rating of the bond issue draws support not only from GoK’s commitment but also from the explicit support extended by GoI towards BMRCL.

Ind-Ra would use the same rating philosophy while rating metro rail projects where GoI and state governments are providing explicit support.

However, the metro rail projects built and financed by private companies through the public-private-partnership route under concessions granted by the government would not be covered by this rating philosophy.

Rating Sensitivities

Positive: Explicit support from GoI for all the senior debts and an improvement in GoK’s credit quality could lead to a rating upgrade.

Negative: Any weakening of links with the sponsors, substantial delays in the receipt of sponsor support or breach of security features and significant deterioration in GoK’s credit profile could result in a rating downgrade.

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