SBI questions veracity of Andhra Pradesh government’s guarantees

HYDERABAD: State Bank of India (SBI) has questioned the veracity of guarantees the YS Jaganmohan Reddy-led Andhra Pradesh government has offered to raise funds for its power sector after the post-election renegotiation of several purchase deals cleared by his predecessor N Chandrababu Naidu.

In a letter dated September 30, SBI has also raised concerns about the state’s rising outstanding debt and sovereign guarantees. The bank was responding to an application for a Rs 3,000-crore term loan by the Andhra Pradesh Power Finance Corporation (APPFCL).

In its letter, SBI sought the response of the APPFCL managing director on the “veracity of the guarantee of the government of AP in the context of each succeeding state government not honouring the commitments made by the previous governments”.

Andhra Pradesh special secretary (finance) and MD of APPFCL, KVV Satyanarayana, said the state government has responded to SBI in detail.

Have Explained to SBI: State
Satyanarayana said the state government has written to SBI, seeking to allay the bank’s concerns over repayment capabilities and sovereign guarantees, including those offered by the previous regime. He said SBI’s concerns appear to have largely been based on the ‘D’ rating from Crisil, which was due to debt repayment delays by Telangana entities since APPFCL is yet to be divided between the two states even five years after the bifurcation.

“Several corporations of Andhra had raised funds from various agencies and there is not a single instance of default after the new government was formed. Neither any of the guarantees given by the previous government was withdrawn,” Satyanarayana told ET.


SBI’s concerns may also have been influenced by the new government’s decision to revisit the wind and solar power-purchase agreements (PPA) signed by the previous government, Satyanarayana said.

Jaganmohan Reddy’s government came to power in May and has cited past irregularities to renegotiate the renewable energy PPAs signed by the Chandrababu Naidu regime. The new government also cancelled several large contracts awarded by the Naidu regime. These include the Polavaram irrigation and power projects, and the Machilipatnam port.

The risk management department of SBI has made several observations on the Andhra government’s repayment capability.

On the Rs 3,000 crore of term loans sought through 100% unconditional and irrevocable guarantees of the state government, the bank said that “considering the exceptional rise in outstanding debt as well as in outstanding guarantees, the capability of the AP government to honour its obligations by payment of actual cash rather than substitution by another instrument needs examination”.

Andhra Pradesh had outstanding debt of Rs 2.52 lakh crore last fiscal, which is expected to rise to Rs 3 lakh crore during the current fiscal. Further, the bank said the outstanding guarantees of Andhra witnessed a sharp rise from Rs 9,665 crore in FY17 to Rs 35,964 crore in FY18.

RISK DEPT RAISED CONCERNS
The bank’s risk management department also raised concerns over the credit ratings that various agencies assigned to the planned borrowings of APPFCL.

“Considering the Crisil ‘D’ status of the company’s bonds, the ability …to generate cash flows is questionable and since those very assets are offered as security for our exposure, we have assigned higher risk score against security coverage and the NPA position,” SBI said in its letter. Crisil reaffirmed the ‘D’ rating on September 17.

SBI also sought clarification from APPFCL whether the proposed term loan will be utilised for part or full repayment of the earlier series of outstanding bonds, or the proceeds will be gradually provided for onward disbursement to power utilities.

Apart from seeking to know whether any tripartite agreement will be executed between APPFCL, the Andhra government and the lender bank for repayment of the proposed term loan, SBI sought to know whether a waterfall mechanism will be followed for repayment of bank obligations while escrowing APPFCL’s receivables from the power distribution and generation companies.

The lender also wanted to know “whether (a) priority in repayment obligations in the waterfall mechanism exists”.

Responding to the clarifications sought by the lender, APPFCL assured that it will not use the proposed term loan of Rs 3,000 crore to repay the outstanding bonds. Offering to execute a tripartite agreement with the Andhra government and the lender bank if necessary, the corporation also assured a waterfall mechanism and to “cede priority charge to SBI over the cash flows towards payment of interest and instalment”.