Kerala Infrastructure Investment Fund Board 'BB-/B' Ratings Affirmed; Outlook Stable : S&P

Sep 29, 2022, 05:00 pm

S&P Global Ratings today affirmed its 'BB-/B' ratings on KIIFB. The outlook is stable. They also affirmed the 'BB-' issue rating on the company's outstanding debt.


The stable outlook on KIIFB reflects the long-term rating outlook on the government of Kerala (BB-/Stable/B). S&P considers KIIFB as a strategic policy instrument of the government of Kerala to promote infrastructure financing for at least the next 12-24 months.


S&P may lower the ratings on KIIFB if they see signs of a change in the entity's policy role, a reduction in government support, or a move to significantly lower the government's stake in KIIFB. These could erode the government's obligation or incentive to support the entity.


S&P may also downgrade KIIFB if they lower the ratings on the government of Kerala.


S&P may upgrade KIIFB if they raise the ratings on Kerala, and KIIFB continues to perform the same level of service for the state government.


The ratings reflects their expectation that the likelihood of support to KIIFB from the government of Kerala is almost certain, given the entity's critical role and integral link to the state.


S&P believes that KIIFB executes strategic government policies and is a non-severable arm of the Kerala state government. Thus the ratings on KIIFB mirror those on Kerala. In addition, they do not believe the government support is subject to transition risk.


The ratings on KIIFB are supported by the board's position as the sole agency for the state to implement strategic infrastructure projects. The ratings benefit from the support KIIFB receives from the government in several forms, including guarantees, capital injections, tax revenue streams for funding, and an escrow mechanism.


KIIFB was set up in 1999 as an agency to mobilize funds for capital expenditure on behalf of the Kerala government. After being dormant for more than a decade, the government amended the KIIF Act in 2016 to strengthen oversight, guarantee structure, and controls, with the government intending to use the vehicle in a major way for its infrastructure plans.


S&P's view of KIIFB's role is critical given that it is the nodal infrastructure-funding agency of the Kerala government, focused on strategic projects that are crucial for the economy. KIIFB's policy role and the terms of operations are spelt out clearly in the KIIF Act. KIIFB has approved infrastructure projects worth Indian rupee (INR) 707 billion to date, of which INR164 billion worth are under construction. To support the state's pandemic-related spending, disbursements by KIIFB for the fiscal year ending March 31, 2022, increased by more than 50% year on year to INR85 billion. We expect KIIFB's role in supporting capital expenditure to be paramount in the coming years for the overall development and growth within the state.


There is no clear line of separation between the government of Kerala and KIIFB for infrastructure projects. The state has made public its intention to place all its strategic and large-scale projects with KIIFB. The government's budget has mandated KIIFB as the execution agency across various strategic projects.


In S&P's view, KIIFB is integrally linked to the state through the government's tight supervisory control and support in the shape of a statutory guarantee on the company's debt obligations. KIIFB benefits from having all its debt obligations guaranteed by the state under the KIIF Act. The support reflects the government's commitment to expanding the entity's scale and scope of operations. KIIFB continued to receive its share of revenues during the pandemic despite a strain on the state's finances amid a revenue shortfall and elevated spending needs.


S&P believes that KIIFB's board structure reflects the highest level of commitment and a tight link with the state government. The government appoints KIIFB's CEO and most of the board of directors. KIIFB is the only state government-related entity (GRE) that has the state's chief minister, finance minister, budget secretary, finance secretary, and chief secretary present on the board. The chief minister is the chairman of the board while the minister of finance heads the executive committee. The presence of top government officials heightens the reputational risk for the government if KIIFB were to fail to meet its debt obligations. The CEO is also the chief principal secretary to the chief minister.


The government has in place an escrow mechanism to ensure that tax revenue due to KIIFB from the government is received in a timely manner. KIIFB received INR28 billion from the government of Kerala in the shape of a Motor Vehicle Tax and petroleum cess (levy) in the fiscal year ended March 31, 2022. This is on top of ongoing support, mainly through regular capital infusions and loan guarantees.


In S&P's view, the safeguards and support mechanisms deployed by Kerala for KIIFB are more than what they have generally observed in state-level government-related entities in India. For example, the Fund Trustee and Advisory Commission (FTAC) is an additional oversight body, besides the usual supervision by the Bureau of Public Enterprises, to ensure that investments of the fund are ring-fenced in line with the intent of the KIIF Act and that there is no diversion of funds. Notably, the three-person FTAC is headed by eminent central officials--a former comptroller and auditor-general of India, a former deputy governor of the Reserve Bank of India (RBI), and a retired executive director of the RBI.


S&P believes the strength of government support for KIIFB offsets the uncertainties relating to the company's financial position. In our view, KIIFB's importance to the government of Kerala, at least in the next few years, will translate into timely funding support should the entity encounter difficulty in servicing its debt obligations.