Uttar Pradesh Power Corporation Limited - Rating Rationale - The Fixed Income
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6/23/2021 Rating Rationale
Rating Rationale
April 11, 2018 | Mumbai
Uttar Pradesh Power Corporation Limited
'CRISIL A+(SO)/Stable' Converted from Provisional Rating to Final Rating for Bond
Rating Action
CRISIL A+(SO)/Stable (Converted from Provisional
Rs.5493 Crore Bond
rating to Final rating)
Rs.4500 Crore Bond CRISIL A+(SO)/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale
CRISIL has converted the provisional rating assigned to the Rs.5493 crore Bond of Uttar Pradesh Power Corporation
Limited (UPPCL) to final rating of 'CRISIL A+(SO)/Stable'. The executed documents are in line with the transaction terms at
the time of provisional rating. CRISIL has also reaffirmed the ratings on Rs.4500 crore Bond of UPPCL at 'CRISIL A+
(SO)/Stable'.
As required, CRISIL has received the following final legal documents:
* Debenture trustee agreement,
* Debenture trust deed,
* Deed of Guarantee
* Default Escrow account agreement
* Deed of Hypothecation
* Accounts agreement
* Debenture Trustee Awareness Letter
* Representations and Warranties Letter
The rating reflects the strength of an unconditional and irrevocable guarantee provided by the Government of Uttar Pradesh
(GoUP), a trustee-administered escrow and payment mechanism for the bonds and presence of adequate liquidity in the
form of debt service reserve account (DSRA). The rating also factors in GoUPs healthy revenue surplus and own tax
buoyancy with its large economic base. The ratings are however constrained by its relatively high debt levels with moderate
economic management and traction in power sector reforms which are yet to materialize, weak socio-economic parameters
and below average financial performance of UPPCL.
Analytical Approach
For arriving at the rating, CRISIL has applied its criteria on rating instruments backed by guarantees. In addition to the state
guarantee, payment mechanism provides for an enhanced liquidity cushion through presence of DSRA and a subsidy
trapping mechanism in case DSRA is utilized. This liquidity buffer mitigates the risk of delayed payment, if any from the state
government and thereby lowers the risk for the instrument.
Key Rating Drivers & Detailed Description
Strengths
* Presence of an unconditional and irrevocable guarantee provided by GoUP, trustee-administered escrow and
payment mechanism, and adequate liquidity
The issuance benefits from credit enhancement provided by a well-defined T-structured guarantee trigger mechanism,
adequate liquidity buffer and a mechanism to trap the subsidy receipts to fill in the DSRA in case the same is utilized.
The primary cash-flows to be harnessed for bond servicing will come via escrow of electricity receivables, of around Rs.10
crores, per day, per tranche of issuance. The standing instruction on this account will auto-sweep the pro-rated amounts on
a daily basis, to a bond servicing account, providing adequate cover. In the event of a shortfall in primary cashflows, the
structure draws comfort from the legal recourse to the state government via a trustee monitored guarantee invocation
framework.
In addition, the rating is further supported by the presence of a 2-quarter DSRA as a liquidity cushion, which lowers the risk
of any delay in receipt of payment from the state government. In the event of DSRA utilisation, the structure provides for
trapping of subsidy receipts which are a steady budgeted monthly inflow from the state of around Rs.330 crores and would
first be used to top up the DSRA, well before the next payment cycle. CRISIL believes that this additional liquidity buffer
provides additional strength to the payment structure and adequately provides protection from any administrative delays.
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Uttar_Pradesh_Power_Corporation_Limited_April_11_2018_RR.html 1/56/23/2021 Rating Rationale However frequent utilization of DSRA, non-promptness in receipt of funds from the state government or non-compliance with the timelines of the T-structure by the Trustee, would continue to be key rating sensitivity factors. * Amongst largest economy with healthy revenue surplus and own tax buoyancy Uttar Pradesh (UP) has the 3rd largest Indian state in terms of Gross State Domestic Product (GSDP) with consistent revenue surpluses for the past 10 years, benefitting primarily due to high share in central tax devolutions (SICT) and healthy levels of state's own tax revenues (SOTR). UP because of its large population base gets the largest share of around 18%. Also being a consumption driven state, its revenues are also expected to benefit from collections under good and services tax (GST). Total revenue receipts are expected to increase by about 19% in fiscal 2018 partly on account of additional flows under the GST regime. The committed expenditure although elevated at 56% (in fiscal 2017) of revenue expenditure have been coming down over time indicating flexibility to curtail expenditures, if required. Consequently, state is expected to maintain healthy revenue surplus to revenue receipts of 4.5%-5%. Weaknesses * Weak socio-economic parameters UP has relatively weak demographic and socio-economic positioning with low per capita income. The contribution from the secondary sector has a declining trend, with high dependency on primary sector. The state also has the 4th highest population density, low literacy and urbanization rates as well as the lowest number of households electrified. These low levels of social indices will necessitate considerable outlays by the state for eventual convergence to national average level, over a longer term. * High leverage with moderate economic management The leverage remains high with total debt plus guarantee to gross state domestic product (GSDP) at 32.7% in fiscal 2017 which is expected to be range bound over the medium term. Furthermore, provision for entire farm loan waiver of Rs.36,400 cr. and high committed expenditure driven by the implementation of 7th pay commission may reduce the fiscal space. While CRISIL expects government to curtail capital expenditure to maintain the gross fiscal deficit (GFD) to GSDP at about 3% in fiscal 2018, significant curtailments may impact future revenue potential. States' power reforms have led to reduction in Aggregate Technical & Commercial (AT&C) losses, over the previous fiscal, however the initiatives are yet to fully catch up with the targets stipulated in the UDAY memorandum. State has also resorted to borrowings under the Ways and Means Advances to manage its liquidity, indicating moderate economic management. CRISIL expects the announcement of the industry policy, steps being taken to reform power sector and presence of same government at center and state will aid in synergies, and benefit the state over medium to long term. However, traction in improvements, leverage levels and continuation of high fiscal deficit will remain a key monitorable. * Below average financial performance of UPPCL The performance of UPPCL remains weak with EBIDTA level losses. The company, along with the state government, has undertaken a number of measures including regular monitoring of progress under UDAY, setting up of bijli thanes to tackle power theft, focusing on rural electrification and metering; benefits of which are yet to translate into improvement in company's financial position. CRISIL believes that power sector will continue to remain critical for the state Government and its deficits will be well supported through budgetary provisions. However significant leveraging to support future losses or delays in meeting other financial and commercial obligations or any change in Government's stance towards the sector will be key monitorables. Outlook: Stable CRISIL believes that UPPCL bonds will continue to benefit from its strong payment structure and support from GoUP over the medium to long term. Upside scenario: * Sustained improvement in the power sector and reform orientation of the state Downside scenario: * Significant adverse impact on GoUP's fiscal performance over the medium term. * Decline of the liquidity buffers or non-adherence to the payment structure. About the Company UPPCL was formed on January 14, 2000 by unbundling the Uttar Pradesh State Electricity Board (UP SEB) into three separate entities: UPPCL, holding the Transmission & Distribution business, Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited, which holds the Thermal Generation and, Uttar Pradesh Jal Vidyut Nigam Limited (UPJVNL), which holds Hydro Generation business The transmission business was subsequently carved out of UPPCL into an independent government company in 2007 called Uttar Pradesh Power Transmission Company Limited. The 5 discoms under UPPCL include Dakshinanchal Vidyut Vitran Nigam Limited (DVVNL or the Agra Discom), Madhyanchal Vidyut Vitran Nigam Limited (MVVNL or the Lucknow Discom), Purvanchal Vidyut Vitran Nigam Limited (PVVNL or the Varanasi Discom), Paschimanchal Vidyut Vitran Nigam Limited (PaVVNL or the Meerut Discom) and Kanpur Electricity Supply Company (KESCO). Key Financial Indicators-UPPCL Standalone Particulars Unit 2017* 2016* Revenue Rs cr 43,422 37,308 Profit After Tax Rs cr -8,817 -15,387 PAT margin % -20.3 -41.2 Adjusted debt/Adjusted networth Times 6.58 7.71 https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Uttar_Pradesh_Power_Corporation_Limited_April_11_2018_RR.html 2/5
6/23/2021 Rating Rationale
Interest coverage Times NM NM
*Provisional
Government of Uttar Pradesh- reported financials
Particulars Unit 2017 (RE) 2016 (Accounts)
Revenue Receipts Rs cr 269,407 227,075
Revenue Surplus Rs cr 24,506 14,340
Gross Fiscal Deficit Rs cr 55,021 58,475
GFD/GSDP % 4.4% 5.3%
Debt^/GSDP % 32.7% 34.5%
RR/Interest Times 9.8 10.6
^Including guarantees
Any other information:
Salient features of the bond backed by the State Government guarantee:
* The NCD will have quarterly interest and repayments
* The tenure will be for 10 years repayments commencing from the end of 7th quarter
* Upfront creation of liquidity facility in the form of DSRA for next two-quarter of principal and interest payments (in the form
of cash), additional DSRA augmentation within 15 days after end of 5th quarter to take care of enhanced servicing
requirements.
* Standing instruction from one collection account (or Designated Receipt Account) of the borrower having an average daily
inflow of atleast Rs 10 cr. for daily transfer into the Bond Servicing Account.
* This account will be free from any encumbrance or escrow towards any existing or future lenders or creditors.
* Subsidy received from state government will be deposited in a separate account called Subsidy Receipt Account. This
arrangement would be agreed upon with the state government. If DSRA is dipped into, the default escrow on this Subsidy
Receipt Account will get activated and all funds received in this account would be trapped and first used to top up the
DSRA.
Transaction Structure:
Assuming T is the bond issuance day and T1, T2 and T3 are subsequent bond payment dates, one quarter apart:
Date Particulars
From T1-
UPPCL Bond Servicing account to be funded daily. The funds to be transferred in such a manner so that the
90 to T1-
entire servicing required in a quarter, are collected by T-15 days (i.e. in 75 days)
15
T1-14 Debenture Trustee will monitor the sufficiency of the balance
T1-14 to
Trustee will inform GoUP and Rating Agency of any shortfall. This would be a soft call on the guarantee.
T1-10
Trustee will ask GoUP to make good the shortfall as per terms of the guarantee by T-3 day. This will be a
T1-9
stronger call on the guarantee with a notice being sent by Trustee.
T1-2 If shortfall still persist then Trustee will transfer funds from DSRA into the UPPCL Bond Servicing account
T1 Meet the Bond payment
If DSRA is utilized, it will trigger a default escrow on the Subsidy Receipt Account on next working day, by
which the subsidy would start getting trapped till DSRA is not fully replenished.
T1+76 to
T1+80 Trustee will call upon GoUP to make good the entire shortfall i.e towards T1 and T2 payments. This would be
(or T2-14 a soft call on the guarantee.
to T2-10)
Trustee will notify GoUP to make good the shortfall (including the amounts of any previous shortfalls) as per
T1+81
terms of the guarantee by T2-3 day. This will be a stronger call on the guarantee with a notice being sent by
(or T2-9)
Trustee.
T1+88
If shortfall still persist then Trustee will transfer funds from DSRA into the UPPCL Bond Servicing account
(or T2-2)
T2 Meet the Bond payment
The Trustee will send a final notice to the state government stating its intention to invoke the guarantee within
T2+1
10 days if the shortfall is not paid.
Expiry of notice period, the Trustee will invoke the state guarantee the next day to the extent of meeting the 2
T2+11
quarter-DSRA shortfall
T3 Meet the Bond payment
If a payment default happens on T3, then one day after that, there will be an invocation of guarantee calling
After T3
for acceleration on entire outstanding facility.
Any major change in the salient features or transaction structure in the final documents would be a rating sensitivity factor.
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available
on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for
investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Uttar_Pradesh_Power_Corporation_Limited_April_11_2018_RR.html 3/56/23/2021 Rating Rationale
Type of Date of Issue Size Rating Assigned with
ISIN Coupon Maturity date
instrument allotment (Rs cr) Outlook
INE540P07186 Bonds 05-Dec-17 0.0975 18-Oct-19 264.6 CRISIL A+(SO)/Stable
INE540P07194 Bonds 05-Dec-17 0.0975 20-Oct-20 529.2 CRISIL A+(SO)/Stable
INE540P07202 Bonds 05-Dec-17 0.0975 20-Oct-21 529.2 CRISIL A+(SO)/Stable
INE540P07210 Bonds 05-Dec-17 0.0975 20-Oct-22 529.2 CRISIL A+(SO)/Stable
INE540P07228 Bonds 05-Dec-17 0.0975 20-Oct-23 529.2 CRISIL A+(SO)/Stable
INE540P07236 Bonds 05-Dec-17 0.0975 18-Oct-24 529.2 CRISIL A+(SO)/Stable
INE540P07244 Bonds 05-Dec-17 0.0975 20-Oct-25 529.2 CRISIL A+(SO)/Stable
INE540P07251 Bonds 05-Dec-17 0.0975 20-Oct-26 529.2 CRISIL A+(SO)/Stable
INE540P07269 Bonds 05-Dec-17 0.0975 20-Oct-27 529.2 CRISIL A+(SO)/Stable
INE540P07277 Bonds 27-Mar-18 0.1015 20-Jan-20 323 CRISIL A+(SO)/Stable
INE540P07285 Bonds 27-Mar-18 0.1015 20-Jan-21 646 CRISIL A+(SO)/Stable
INE540P07293 Bonds 27-Mar-18 0.1015 20-Jan-22 646 CRISIL A+(SO)/Stable
INE540P07301 Bonds 27-Mar-18 0.1015 20-Jan-23 646 CRISIL A+(SO)/Stable
INE540P07319 Bonds 27-Mar-18 0.1015 19-Jan-24 646 CRISIL A+(SO)/Stable
INE540P07327 Bonds 27-Mar-18 0.1015 20-Jan-25 646 CRISIL A+(SO)/Stable
INE540P07335 Bonds 27-Mar-18 0.1015 20-Jan-26 646 CRISIL A+(SO)/Stable
INE540P07343 Bonds 27-Mar-18 0.1015 20-Jan-27 646 CRISIL A+(SO)/Stable
INE540P07350 Bonds 27-Mar-18 0.1015 20-Jan-28 646 CRISIL A+(SO)/Stable
NA Bonds^ NA NA NA 3.8 CRISIL A+(SO)/Stable
^Not yet placed
Annexure - Rating History for last 3 Years
Start of
Current 2018 (History) 2017 2016 2015
2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
CRISIL A+
(SO)/Stable|
CRISIL A+ CRISIL A+
Bond LT 9993 08-03-18 Provisional 29-12-17 -- -- --
(SO)/Stable (SO)/Stable
CRISIL A+
(SO)/Stable
Provisional
24-11-17 CRISIL A+
(SO)/Stable
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Approach to Financial Ratios
Criteria for rating instruments backed by guarantees
Rating Criteria for State Governments
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