Chennai Corporation bonds get CRISIL ''AA(so)''

Rs448 million Bond programme AA(so)/Stable

CRISIL's 'AA(so)' rating on the Corporation of Chennai's (CoC) bonds issue indicates high safety in timely payment of the interest and principal on the rated bonds, as well as the strength of the credit enhancement mechanism provided for the instrument, which involves escrow of CoC's property tax revenues. Established in 1688, the CoC is India's oldest municipality. Its jurisdiction extends over an area of 174 sq km, inhabited by a population of 4.22 million (2001 census). CoC is governed by the provisions of the Chennai City Municipal Corporation (CCMC) Act, 1919.

The rating reflects CoC's strong economic base and healthy financial profile, driven by increasing revenues and controlled operating expenditures, resulting in healthy operating revenue surpluses in FY 2003-04. The increase in revenues is primarily on account of improved property tax collections and a higher level of assigned taxes, which comprise a surcharge on stamp duty and entertainment taxes. Traditionally, CoC has funded its capital expenditure from revenue surpluses and has maintained stable debt levels. Moreover prepayment of debt in 2003-04 has resulted in reduction of debt service obligations. CoC's rating also draws comfort from its relatively low service obligations, which do not include water supply and sewerage.

CRISIL expects CoC's revenue surplus levels to grow moderately with an improvement in its collection efficiency and continued control over employee expenditure. CoC's aggressive capital expenditure plans means its debt levels are likely to increase. But a rise in the revenue surplus will ensure adequate debt-servicing ability.

CoC's rating is constrained by its relatively low self-reliance in terms of revenues, its low taxing power, and its high proportion of employee expenses. About 40 per cent of its total revenues come from assigned taxes, and this high dependence reflects unfavourably on the corporation. CoC does not levy octroi, an important source of revenues for municipal corporations elsewhere in India. Besides, its committed expenditure (employee costs) constrains CoC's flexibility to spend on services.

Outlook: CRISIL expects CoC to maintain its continued healthy financial profile and controlled debt levels and comfortable debt protection measures