Ind-Ra-New Delhi-29 November 2017: India Ratings and Research (Ind-Ra) has rated U.P. Power Corporation Limited’s (UPPCL) proposed bonds (non-convertible debentures (NCDs)) as follows:
| Instrument Type | Date of Issuance | Coupon Rate | Maturity Date | Size of Issue (million) | Rating/Outlook | Rating Action |
| Proposed bonds (NCDs) | – | – | – | INR44,982 (including a green shoe option of INR14,722) | Provisional IND A+(SO)/Stable | Assigned |
The final rating shall be confirmed upon the receipt of all documents executed for this rated transaction, provided the executed documents are complying with the proposed structure.
KEY RATING DRIVERS
Structured Debt Servicing Mechanism: The rating is supported by the presence of a well-orchestrated debt servicing mechanism to tap into UPPCL’s top line/cash flows. The mechansim will ensure a minimum daily transfer of INR100 million from UPPCL’s daily collections to a designated receipt account (DRA) on the first priority basis, which then would flow into the UPPCL bond servicing account (UBSA). The transfers into DRA will remain free from any encumbrance. Starting from the first day of each quarter, a pro-rated amount will be auto transferred to UBSA from DRA. The daily transfers into UBSA would be such that the entire amount required for the immediate debt servicing will be available in the UBSA 15 days prior to the servicing date (T-15).
The structure provides for the government of Uttar Pradesh’s (GoUP) intervention/support in case of a shortfall in the UBSA without invoking the guarantee extended by the government for the rated bonds. On 14th day prior to the bond service date (T-14 day) in case the built-up is insufficient; the debenture trustee would inform the GoUP and ask them to cover up the shortfall by the T-10 day. If the GoUP fails to cover up the shortfall in UBSA 10 days prior to the bond servicing date, the trustee will call upon the GoUP guarantee on T-9 day to the extent of shortfall. Thereafter, the GoUP will have to make good the UBSA shortfall by T-3 days.
Rolling DSRA: The rating is further supported by the liquidity buffer available for bond servicing in the form of a rolling debt service reserve account (DSRA); which at all times have to be maintained at an amount equivalent to the total debt servicing obligation (principal and interest) of the next two quarters. The initial DSRA will be created one day prior to the pay in date. If the shortfall in the UBSA persists on T-2, then the trustee would transfer funds from DSRA to make good the shortfall in UBSA.
Since it is a rolling DSRA, UPPCL will need to top it up to meet the enhanced principal repayment requirement falling due from the seventh quarter within 15 days after the expiry of the fifth quarter.
Dipping into Subsidy Account: The power subsidy received by UPPCL will become available to the trustees for recouping DSRA in case of its impairment. The average annual power subsidy received by UPPCL during FY12-FY17 was INR49 billion. The power subsidy of UPPCL will be routed into a specified account with a default escrow mechanism. In case of DSRA impairment or shortfall, the escrow mechanism will be activated.
Further, since the subsidy is received in varying monthly instalments, to avert any adverse impact from lower subsidies, the structure provides for allocation of revenues from one or more urban domestic divisions. If the subsidy is lower than INR6 billion per quarter for any two consecutive quarters, then UPPCL will hypothecate revenue flow from urban domestic divisions in favour of the debenture trustee till the time the flow into this subsidy account is restored to INR8 billion per quarter.
Curing DSRA Impairment: In case of DSRA impairment, firstly the escrow mechanism on UPPCL’s default escrow account would be activated on the very next working day on the instruction of the debenture trustee. All funds available in the account would be immediately transferred into DSRA. Secondly, all amounts in the UBSA and DRA shall also be transferred into DSRA on an ongoing basis until DSRA is replenished. This would remain in force till such time DSRA is fully replenished.
Unconditional, Irrevocable Guarantee: The bonds are supported by the GoUP’s credit profile, which has extended an unconditional and irrevocable guarantee for the bonds. In case of any event, on any payout date leading to the funds available in DSRA being lower than the servicing requirement for the immediate next servicing date, a final notice would be served to the GoUP. Furthermore, if the situation is not remedied within the next 10 days, the trustee would invoke the government guarantee.
Secured Bonds: The bonds shall be secured by way of an exclusive charge on the current assets including receivables of the company with a minimum cover of 1.10x to be maintained during the tenure of the bonds. The subsidy and the assigned revenue inflows from urban domestic divisions (if required to be allocated) would also be hypothecated in favour of the trustee. The charge pertaining to hypothecated assets would be filed with the office of the concern Registrar of Companies and Central Registry of Securitisation Asset Reconstruction and Security Interest.
State Reliance on Centre: Devolution and grants from the central government on an average accounted for about 53% of the GoUP’s revenue receipt during FY11-FY16 (revised estimates (RE)). Although Uttar Pradesh has a decent own revenue generation capacity, the share of central government funds in its revenue increased to 55.92% in FY16 (RE) from 50.64% in FY14. Also, the allocation from the central government is growing at a higher rate (15.88% CAGR over FY12-FY16 (RE)) than the state’s own tax and non-tax revenue (13.52% CAGR FY12-FY16 (RE)).
Fiscal Stress of State: The GoUP has been maintaining a revenue surplus since FY07. Although the quantum of revenue surplus has fluctuated over the years, it ranged between 0.4%-2.2% of gross state domestic product (GSDP) during FY07-FY17 budget estimate (BE). UP’s fiscal deficit/GSDP peaked in FY04 at 7% of GSDP. From thereon, the state’s finances have improved. During FY16-FY17, the GoUP’s finances came under pressure owing to the adjustment related to Ujwal Assurance Discom Yojana. There was a consistent decline in debt/GSDP over FY04-FY14. It declined to 24.2% in FY14 from 46.7% in FY04 and stood at 26.1% in FY15.
The surplus revenue account coupled with fiscal deficit means that borrowings are mainly utilised for capital expenditure. This is positive for the state, as a higher capital expenditure than what the state could fund from its own revenue will enhance the growth potential and the productive capacity of the state economy. Fiscal performance of UP has not shown a linear movement. Owing to the impact of Ujwal Assurance Discom Yojana, UP’s fiscal deficit/GSDP ratio reached 5.32% in FY16 (FY17(RE): 4.41%). However, the GoUP has tried to bring its finances back on track and has pegged FY18 fiscal deficit to GSDP ratio at 2.97%. Maintaining a revenue surplus, along with fiscal deficit below 3%, will be crucial for UP’s budgetary performance.
RATING SENSITIVITIES
Positive: An improvement in UP’s credit profile would lead to a positive rating action.
Negative: Future developments that could, individually or collectively, would result in a negative rating action include:
– any deviation from the terms of the bonds or the structured payment mechanism- weakening of the credit profile of the state
– DSRA amount falling below the next two quarters’ debt servicing requirement for a period of over 15 days anytime during the bond tenor
RATING CRITERIA
‘Rating of Public Sector Entities’, dated 11 September 2015, is available at www.indiaratings.co.in.
COMPANY PROFILE
UPPCL is the power distribution arm of the state electricity board. It was incorporated on 30 November 1999 after the unbundling of UP State Electricity Board and came online on 15 January 2000. It undertakes business through five subsidiaries.
FINANCIAL SUMMARY
| Government of Uttar Pradesh | ||
| (INR billion) | FY16(RE) | FY17(BE) |
| Revenue receipts | 2,477.2 | 2,815.6 |
| Revenue expenditure | 2,293.5 | 2,533.5 |
| Revenue balance | 183.7 | 282.0 |
| Fiscal balance/GSDP (%) | -5.6 | -3.9 |
| Debt/GSDP (%) | 31.5 | 31.6 |
| RE: Revised estimates BE: Budget estimates Source: Ind-Ra |
||
| UPPCL | ||
| (INR billion) | FY16 | FY17(Provisional) |
| Net Profit | -153.9 | -88.2 |
| Top line | 373.4 | 434.8 |
| Operating margins (%) | -0.45 | -0.39 |
| Net profit margins (%) | -41.21 | -20.28 |
| Source: UPPL | ||
RATING HISTORY
| Instrument Type | Current Rating/Outlook | Historical Rating/Outlook | |||
| Rating Type | Rated Limits (million) | Rating | 18 April 2017 | 2 March 2017 | |
| NCDs | Long-term | INR99,995 | IND AA(SO)/Stable | IND AA(SO)/Stable | IND AA(SO)/Stable |
| Proposed NCDs | Long-term | INR44,982 | Provisional IND A+(SO)/Stable | – | – |
ANNEXURE
| Instrument | ISIN | Date of Issuance | Coupon Rate (%) | Maturity Date | Size of Issue (million) | Rating/Outlook |
| NCDs | INE540P07046 | 17 February 2017 | 8.97 | 15 February 2021 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07053 | 17 February 2017 | 8.97 | 15 February 2022 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07061 | 17 February 2017 | 8.97 | 15 February 2023 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07079 | 17 February 2017 | 8.97 | 15 February 2024 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07087 | 17 February 2017 | 8.97 | 14 February 2025 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07095 | 17 February 2017 | 8.97 | 13 February 2026 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07103 | 17 February 2017 | 8.97 | 15 February 2027 | INR9,300 | IND AA(SO)/Stable |
| NCDs | INE540P07111 | 27 March 2017 | 8.48 | 15 March 2021 | INR4,985 | IND AA(SO)/Stable |
| NCDs | INE540P07129 | 27 March 2017 | 8.48 | 15 March 2022 | INR4,985 | IND AA(SO)/Stable |
| NCDs | INE540P07137 | 27 March 2017 | 8.48 | 15 March 2023 | INR4,985 | IND AA(SO)/Stable |
| NCDs | INE540P07145 | 27 March 2017 | 8.48% | 15 March 2024 | INR4,985 | IND AA(SO)/Stable |
| NCDs | INE540P07152 | 27 March 2017 | 8.48 | 14 March 2025 | INR4,985 | IND AA(SO)/Stable |
| NCDs | INE540P07160 | 27 March 2017 | 8.48 | 13 March 2026 | INR4,985 | IND AA(SO)/Stable |
| NCDs | INE540P07178 | 27 March 2017 | 8.48 | 15 March 2027 | INR4,985 | IND AA(SO)/Stable |
| Proposed NCDs* | INR44,982 | Provisional IND A+(SO)/Stable | ||||
| Total | INR144,977 |
*Unutilised
COMPLEXITY LEVELS OF THE INSTRUMENTS
For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.
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