State Level Pooled Fund Mechanisms under the Pooled Fund Scheme introduced by the Central Government of India were created primarily for facilitating market borrowings of Urban Local Bodies for implementing infrastructure development projects by allowing them access to capital and financial markets at lower cost of funds. The State Pooled Finance Entity for each state is responsible for the management of raising funds from the markets and in distribution of the same among the ULBs in the state based on their project requirements. The Pooled Finance Development Fund (PFDF) is used mainly to contribute towards the Credit Rating Enhancement to ensure that the credit ratings provided to these pooled fund instruments fall within the investment grade (in most cases, the stand alone credit rating of the Urban Local Body is expected to be in the non-investment grade).
The usual structure of a pooled finance scheme is represented here:
The Debt Service Reserve Fund/ Bond Service Fund (DSRF/BSF) is usually created by the State Pooled Finance Entity by collection of one principal amount from each ULB and maintained as accounts held by the State Pooled Finance Entity and the ULB jointly. In cases where there is a delay in the payment by the ULB, the amount is repaid by drawing down on the DSRF and the same amount is then topped up by collection from the ULB. In cases where the amount is not received from the ULB in question, the amount is collected from the State Finance Commission Devolution Fund allocated to the ULB.
Credit Rating Criteria:
The credit rating criteria for pooled fund schemes is represented by the process chart below:
The rating process includes an analysis of
- Credit worthiness of the ULBs being financed under this scheme:
- Brickwork Ratings determines the credit worthiness of individual ULBs using the rating criteria as defined in the criteria document for Urban Local Bodies.
- Brickwork Ratings also considers the overall performance of the state government as this is expected to influence the financial strength of the ULBs.
- Performance of the State Pooled Finance Entity
- Overall financial position including grants received, performance on debt schemes already launched
- Management skill sets
- Support provided by state and central governments
- Structure of the Pooled Fund Bond:
- Seniority of the bond
- Project concentration and risks – Types of projects being financed
- Credit Enhancements provided
- Cash Collateral/Guarantees
- Escrow Mechanisms
- SFCD Intercept Availability
Availability of any other collateral including access to excess cash flows available with the SPFE
Stress Tests:
The cash flows for repayment of the loans are stressed under different scenarios to check for possible delays/defaults in the repayment of the loans. Cash flow scenarios generated include possible draw-downs on the credit enhancements provided to arrive at the possible rating. A typical cash flow stress test is indicated by the chart below:
In the chart above, the stressed cash flows fall below the Debt service requirements in the second year. The quantum of shortfall is measured and compared with the availability of other cash flow sources such as the Debt Service Reserve Fund and cash collateral provided and augmented during the analysis. The stress scenarios are usually done at both the individual ULB levels as well as the Pooled level while arriving at the overall credit rating that is assigned.
|
