Andhra’s Amaravati city bonds get negative rating where Franklin, Aditya Birla debt funds have Rs 1,200 cr exposure

Franklin Templeton MF has about Rs 979 crore and Aditya Birla MF hold Rs 226.5 cr worth bonds sold by Andhra govt for Amaravati capital city project, which is being abandoned by the Reddy government

Kumar Shankar Roy Feb 1, 2020

Amaravati City bondsRegular readers of RupeeIQ will remember our article in August last year about Amaravati capital city project which had become victim of the regime change at Andhra Pradesh state government. A lot of those risks are now being unfurled right in front of our eyes. When rating agencies announce negative rating actions on a debt issuer one after another in three consecutive months that is sure to turn heads.

On November 21, Acuité Ratings & Research downgraded the long term rating on the Rs 2,000-crore unsecured non-convertible debentures of Andhra Pradesh Capital Region Development Authority (APCRDA), which is responsible for developing the proposed capital city of the state at Amaravati. Then on December 31, Brickwork Ratings revised its outlook to negative for APCRDA. And on January 29 this year, CRISIL has placed its rating on the Rs 2,000 crore bond of APCRDA on ‘Rating Watch with Negative Implications’.

Franklin Templeton MF and Aditya Birla Sun Life MF hold Rs 1,200 crore worth Amaravati bonds sold by APCRDA, whose strategic importance is being questioned as political issues mar the development of the capital city. It has increasingly become clear that the new state government, led by chief minister Y S Jaganmohan Reddy, does not share the Amaravati city dream of former CM Chandrababu Naidu, and has proposed a 3-capital structure with the executive capital at Visakhapatnam, judicial capital at Kurnool and legislative capital at Amaravati. Amaravati is located in Guntur district with area of 217 sq. km. and is strategically located within 30 minutes of driving distance of two major urban centres viz. Vijayawada and Guntur.

Separate rating actions in same direction

CRISIL rates APCRDA’s Rs 2,000 crore bond as CRISIL A+(CE) and has placed it on ‘Rating Watch with Negative Implications’. The rating, CRISIL says, reflects heightened uncertainty regarding the status of the APCRDA Act given the ongoing discussion on its annulment. Repeal of the APCRDA Act will reduce the strategic importance of the authority as it will lose its ability to raise revenue through land monetisation. The rating on APCRDA’s bonds derived its strength from a well-defined payment structure including the government guarantee and sustenance of debt service reserve account, but any change in the payment structure may have material implications on the rating. It may be recalled that on September 30, 2019, the outlook was revised to ‘Negative’ from ‘Stable’ as the capital expenditure (capex) of APCRDA was under review. The government of Andhra Pradesh (GoAP) had put on hold/cancelled most of the city’s contracts.

Brickwork Ratings, which rates Rs 2,000 crore bonds at BWR A+ (CE) and Rs 10,000 crore worth proposed term loans at BWR A (CE), last month has revised the outlook to negative on account of political issues associated with the development of the capital city of Andhra Pradesh and uncertainty in the project’s development in the capital city. It clearly said the ratings are constrained by the implementation risks for the development of the city, any delay in availability or tie ups of funds for the development of the capital city shall impact the cash flows of the company (APCRDA), deterioration of the Andhra Pradesh state finances etc.

Acuité in November downgraded the long term rating on Rs 2,000 crore APCRDA bonds to ACUITE A+ (CE) from ACUITE AA- (CE). The outlook is Negative. This followed it August action when it had placed the long term rating of ACUITE AA- (CE) on ‘Rating watch with Negative implications’ in response to the withdrawal by certain lenders and its likely impact in the pace of development of Amaravati project. The rating downgrade, Acuite said, is on account of Acuité’s belief that APCRDA will face headwinds in initial stage of implementation on account of the changes in the overall operating environment and adverse development such as withdrawal from key lenders to the project.

The erstwhile state of Andhra Pradesh was bifurcated into the successor states of Andhra Pradesh (AP) and Telangana in June 2014 vide the Andhra Pradesh Reorganization Act, 2014 act of the Indian Parliament. APCRDA) was formed in 2014 under ‘AP Capital Region Development Act 2014’ and is a statutory body under Government of Andhra Pradesh.

MFs have high stakes

APCRDA raised Rs 2,000 crore from Amaravati bonds in 2018. The Amaravati bonds are in the nature of government guaranteed listed unsecured redeemable non convertible taxable bonds. These bonds carry a rate of interest of 10.32%, but have different maturities ending in the year 2024, 2025, 2026, 2027 and 2028.

As on December 31, 2019, Franklin Templeton MF had Rs 979 crore exposure through four schemes. Franklin India ST Income Plan (Rs 468.7 crore), Franklin India Credit Risk Fund (Rs 304.5 crore), Franklin India Income Opportunities Fund (Rs 112.7 crore) and Franklin India Dynamic Accrual Fund (Rs 92.9 crore) have between 2-5% of individual fund assets in Amaravati bonds.

As on December 31, 2019, Aditya Birla Sun Life MF had Rs 226.5 crore exposure through four schemes. Aditya Birla Sun Life Credit Risk Fund (Rs 73 crore), Aditya Birla Sun Life Medium Term Plan (Rs 71.3 crore), Aditya Birla Sun Life Dynamic Bond Fund (Rs 49.8 crore) and Aditya Birla Sun Life Short Term Fund (Rs 32.4 crore) have between 1-2% of individual fund assets in Amaravati bonds.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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