HONG KONG/BEIJING: Fitch Ratings has affirmed Kerala Infrastructure Investment Fund Board’s (KIIFB) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘BB’ with the Outlook being maintained at Stable.
About three months ago, another international rating agency, Standard & Poor’s (S&P) had lowered the rating of KIIFB along with the State of Kerala’s long-term credit rating to ‘BB-’ from ‘BB’, indicating further weakening of the already weak fiscal metrics of the state, with the Outlook being retained at Stable.
Fitch has also affirmed KIIFB’s Rs50 billion (Rs5000 crore) medium-term note (MTN) programme and the Rs21.5 billion (Rs2150 crore) 9.723 per cent senior secured notes due 2024 under the programme at ‘BB’.
“The notes are issued by KIIFB directly and are unconditionally and irrevocably guaranteed by India’s State of Kerala (BB/Stable) acting through the Finance Department of Kerala,” the agency noted.
Hailing the retention of BB rating by Fitch, a KIIFB statement said the international rating agency’s ‘vote of confidence’ in the Board has in fact boosted the morale of KIIFB management at a time when even developed countries and reputed corporates from the world over are getting downgraded by international rating agencies.
‘Very Strong’ Status, Ownership Control
KIIFB has a special legal status whereby its liabilities are automatically transferred to the state in a default. Government control means KIIFB has to strictly follow the state’s plan to finance and implement various infrastructure projects. Its board consists of government officers and independent experts.
In addition, a fund trustee and advisory commission acts as KIIFB’s trustee to ensure there is no diversion of funds. Fitch explained that the state government is statutorily mandated to guarantee the payment of principal and interest of any funds that KIIFB proposes to raise.
Highlighting the arrangement whereby the state government has created a dedicated ring-fenced fund to help KIIFB’s debt servicing, the agency said KIIFB draws on the entire petroleum cess and a progressive step-up share of up to 50 per cent of the motor-vehicle tax (MVT) collected by the state.
‘Strong’ Socio-Political Default Implications
Fitch’s assessment reflects KIIFB’s designated role as an exclusive financing vehicle for critical infrastructure-development projects. The projects span various public sectors, including transportation, industrial parks, energy, water resources and social infrastructure. The development of these sectors is crucial to improve the state’s living standards and for its sustainable economic growth.
Proxy financing platform
KIIFB is a proxy financing platform for large-scale and capital-intensive state projects, with a total planned project outlay of Rs500 billion (Rs50,000 crore) by 2024.
(The project outlay has since then exceeded Rs57,000 crore)
Fitch said that KIIFB’s creditworthiness is directly linked to that of the state in view of the legal guarantee provided by the state government. “A default by KIIFB would lead to direct repercussions for the state’s credibility,” it said.
Fitch assesses KIIFB under its Government-Related Entities Rating Criteria, reflecting the State of Kerala’s ultimate ownership and oversight over KIIFB, the government’s financial support record and the company’s functional role in the state’s development.
Fitch added that these factors indicate a strong incentive for the government to provide extraordinary support to KIIFB, if needed.
