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India Ratings and Research (Ind-Ra) has assigned Karnataka Water and Sanitation Pooled Fund Trust’s (KWSPFT) ₹3.5-crore bank term-loan facility a final rating of ‘IND AA-(SO)’.
KWSPFT is a trust under the Indian Trusts Act 1882 formed by Karnataka government in September 2003 for the purpose of financing infrastructure projects on loan basis in Karnataka. KWSPFT lends to projects undertaken by urban local bodies (ULBs), statutory bodies and public sector undertakings.
Govt supportThe rating agency said key rating parameters for the KWSPFT’s term loan is driven by government support and reflects the availability of a constitutionally guaranteed revenue source – the State Finance Commission (SFC) – to support the proposed term loan debt service.
The rating is supported by the credit quality of the Government of Karnataka (GoK). GoK has extended an unconditional and irrevocable undertaking to a) make a budgetary allocation under the SFC component on an annual basis for the timely and full repayment of debt obligations during the tenor of the term loans and bridge cash shortfalls, if any, after interception of SFC by GoK.
SFC devolutions are provided to urban local bodies (ULBs) including pool participants on a quarterly basis. Historically, lien-free SFC devolutions were adequate to meet the loan service.
Nagarothana schemeKWSPFT’s term loan of ₹3.5 crore is to part-finance urban infrastructure projects in seven, tier two cities – Mysuru, Mangaluru, Ballari, Hubballi-Dharwad, Belagavi, Kalaburgi and Davanagere. These cities have been identified under the Nagarothana scheme by the state government.
KWSPFT has opened a no-lien escrow account exclusively for meeting the debt service before loan disbursal and withdrawals from this account will not be made without the lenders’ approvals.
Payment mechanismThe rating is also supported by the tripartite agreement executed as part of the transaction structure between GoK, KWSPFT and the lenders, delineating the structured payment mechanism. It indicates that 45 working days before debt service date, lenders/KWSPFT shall inform GoK to fund the escrow account by intercepting the SFC devolutions of the pool constituents.
The structure has necessary checks to activate the undertaking commitments of GoK in the event of a shortfall. However, the adherence to the structure largely vests on the lenders.
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