Amaravati City bondsFunding for Amaravati, the proposed capital of Andhra Pradesh, is in limbo. Both the World Bank and Asian Infrastructure Investment Bank (AIIB) have decided to not fund the Amaravati capital city project. Neither new chief minister of Andhra Pradesh, Y.S. Jagan Mohan Reddy, shares the Amaravati city dream of former CM Chandrababu Naidu, nor does the Centre as evidenced by the fact the Government of India on 15 July withdrew its request for financing the proposed project.

Unfortunately, between all this political and factional battles, it is mutual fund investors from all over India that may suffer if the project fails to take off. On August 14, 2018, Andhra Pradesh Capital Region Development Authority (APCRDA), the statutory body under state government for the development of Amaravati, successfully raised Rs 2,000 crore by issuing bonds on private placement basis using BSE BOND platform. As per latest data, fund-houses like Franklin Templeton and Aditya Birla Sun Life have together invested close to Rs 1,300 crore through eight debt schemes in the Amaravati bonds. What will be the fate of these bondholders at a time when a new regime virtually discards a project by an older regime?

Why Amaravati

The erstwhile state of Andhra Pradesh was bifurcated in to the successor states of Andhra Pradesh (AP) and Telangana in June 2014 vide the Andhra Pradesh Reorganization Act, 2014 act of the Indian Parliament. Andhra Pradesh Capital Region Development Authority (APCRDA) was formed in 2014 under ‘AP Capital Region Development Act 2014’ and is a statutory body under Government of Andhra Pradesh. The objectives of APCRDA are planning, coordination, execution, and financing for the development of Amaravati, which is estimated to cost Rs 1 lakh crore.

Amaravati is located in Guntur district with area of nearly 217 sq. km. and is strategically located within 30 minutes of driving distance of two major urban centres viz. Vijayawada and Guntur. The Amaravati city was a dream project of Chandrababu Naidu, who received a drubbing in the Andhra Pradesh Legislative Assembly and Lok Sabha elections at the hands of Y.S. Jagan Mohan Reddy led YSR-Congress. After assuming power, Jagan — who is the son of late YS Rajasekhara Reddy — was clear that ‘the city of the future’ Amaravati did not rank high on the new regime’s priority list. Media reports indicate keeping the promise he made during the recent assembly elections, new Andhra Pradesh CM has agreed in principle to return lands to farmers who were unwilling to part with it or which the government does not need any longer. He even said that irregularities were found in allocating plots to farmers who have given their land.

Amaravati bonds

When Amaravati bonds in 2018 raised about Rs 2,000 crore, it was seen as the testimony of investors’ confidence in the state of Andhra Pradesh and Amaravati. But a year down the line, things have changed. While so far there are no reports of the bond investors openly voicing their worry, the confidence in the greenfield smart city is lacking.

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. Due to a 5-year moratorium clause, bond investors cannot redeem the principal amount. A moratorium period is a time during the loan term when the borrower is not required to make any repayment.

MF exposure

RupeeIQ data shows that four Aditya Birla Sunlife MF debt schemes – Aditya Birla SL Credit Risk Fund, Aditya Birla SL Dynamic Bond Fund, Aditya Birla SL Medium Term Plan and Aditya Birla SL Short Term Opp Fund, have nearly Rs 300 crore in Amaravati bonds. The scheme level exposure for such bonds ranges between 0.15% to 0.72%.

The exposure of Franklin Templeton MF to Amaravati bonds is bigger. Four schemes — Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund, Franklin India Income Opportunities Fund and Franklin India ST Income Plan — hold about Rs 1,000 crore in the Amaravati bonds. The scheme level exposure for such bonds ranges between 0.30% to 3.24%.

Here is a list of debt schemes with the highest % exposures to Amaravati bonds. We have not given the schemes with the highest exposure in value terms, because % exposure is more important.

Scheme Name Holding % # Holding value (Rs Cr)
Franklin India Income Opportunities Fund(G) 3.24 119.01
Franklin India Credit Risk Fund(G) 2.97 206.00
Franklin India Dynamic Accrual Fund(G) 2.51 98.29
Franklin India ST Income Plan(G) 1.71 226.57
Franklin India Credit Risk Fund(G) 1.64 113.51
Franklin India ST Income Plan(G) 1.63 216.24
Aditya Birla SL Short Term Opp Fund(G) 0.72 22.93
Aditya Birla SL Short Term Opp Fund(G) 0.62 19.85
Aditya Birla SL Dynamic Bond Fund(G) 0.60 20.29
Aditya Birla SL Dynamic Bond Fund(G) 0.54 18.23
Source: RupeeIQ                                 # As per latest factsheets

Bond ratings

The Amaravati bonds issuer i.e. APCRDA are rated by Crisil and Acuite. But there are questions behind the factors behind the rating that may have changed. Will Jagan government honour the guarantees of APCRDA at a time when his regime thinks there are irregularities? Who will finance the project when World Bank and others have moved away?

On September 3, 2018, CRISIL converted the provisional rating assigned to the Rs 2,000 crore bond of APCRDA to final rating of ‘CRISIL A+(SO)/Stable’. The rating, Crisil said at that time, reflected the strength of an unconditional and irrevocable guarantee provided by the Government of Andhra Pradesh (GoAP), a trustee-administered escrow and payment mechanism for the bonds and adequate liquidity in the form of a debt service reserve account (DSRA). The rating also factored in the criticality of APCRDA to the GoAP in developing the capital city of Amaravati. The rating also considers the primary cash flows of APCRDA generated through land monetization which would be used to prioritize debt servicing, although timely and adequate monetisation could be a constraint, necessitating GoAP support.

On June 26, 2019, Acuité has reaffirmed the long term rating of ‘ACUITE AA- (SO)’ (read as ACUITE double A (Structured Obligation)) on the Rs 2,000 crore bonds of APCRDA. The rating outlook is ‘Stable’, it said.

Acuite says the rating is reaffirmed on account of 100% completion of land pooling scheme. “The authority has also signed MoUs with various companies for setting up the units in the state. The state has also been provided in-principal approval from GoI for setting up of a greenfield airport at Kurnool. However, considering all the factors, Acuité believes the state will generate a higher employment in near to medium term taking into consideration the developments taking place in the state,’ Acuite said.

RupeeIQ take

When Franklin Templeton MF and Aditya Birla Sun Life MF invested in Amaravati bonds in 2018, they did not know what the future will hold. Political fortunes change in a day. But, if state governments do not honour financial commitments that are linked to projects started by previous regimes, this will be bad for investors. If APCRDA is unable to monetize the land, then how will it pay money? Mutual funds are pass-through vehicles. Investors do not have any saying in where the money is deployed. Fund managers take decisions based on best available information. But, probably the liquidity factor in such instruments must be looked at with deeper insight.

Disclaimer: Vews expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on kumarsroy@rupeeiq.com