The Hindu Business Line : `Adequate safety' rating for KNNL bond issue

CREDIT rating agency, ICRA, has assigned outstanding LA+(SO) rating to the Rs 1,600-crore proposed bond issue of Karnataka Neeravari Nigam Ltd (KNNL), indicating adequate safety.

The ratings are based on structured payment mechanisms incorporating unconditional and irrevocable guarantees from the Government of Karnataka and budgetary provisions for the payment of interest and principle over the tenure of bonds.

According to an ICRA news release, the expenditure and physical plan compliance of KNNL declined sharply in fiscal 2003, which in turn could lead to cost over-runs of its projects. Out of the Rs 1,600 crore, the state utility could raise only up to Rs 350 crore in the current fiscal, Government sources said.

The State Government will provide guarantee up to Rs 250 crore in case of bond issue, they added. "Depending upon market conditions, KNNL could mop up the entire amount in different tranches through bonds," the sources added.

The state utility raised Rs 174.20 crore in its first tranche last fiscal through privately placing bonds at a coupon rate of 10.66 per cent. The second and the final tranche of the last fiscal are still under process of evaluation and collections to the tune of Rs 47.46 crore have been reported till date. The second tranche was for Rs 75 crore issue, which implied that the utility exhausted the Government

In another development, the recently-floated Cauvery Neeravari Nigam Ltd (CNNL) also plans to raise Rs 5,000 crore over the next five years through bond sales to complete close to 10,000 works in the river basin. The utility has estimated Rs 7,175 crore to complete Hemavathi (in Gorur and Tumkur zone), Vatehole, Yagachi, Varuna-Kabini, Cauvery and Chiklihole (Harangi) projects.

However, the World Bank-initiated fiscal correction measures in Karnataka are under pressure from escalating contingent liabilities. These build up almost entirely through guarantees provided to State public sector undertakings and special purpose vehicles (SPVs) for borrowings.

Such guarantees are provided to help these undertakings raise funds from the financial markets, banks and term-lending institutions.

For the current fiscal, the State Government's outstanding guarantees are estimated to be Rs 10,325.16 crore, according to Government sources.

States have been resorting to off-budget borrowings since the last five years. Although there is a legal ceiling on guarantees — 80 per cent of the previous year's actual revenue receipts in Karnataka — SPVs such as Krishna Bhagya Jala Nigam Ltd (KBJNL) and KNNL are exempted.

These two companies account for about 70 per cent of the estimated gross off-budget borrowings of Rs 1,480 crore, the bulk of which is used to refinance the maturing liabilities.

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`Adequate safety' rating for KNNL bond issue