Fitch Ratings has assigned an expected National Long-term rating of 'AA (ind)(SO)' (AA (ind)(SO)) to the INR1283 million long-term bond programme of Nagpur Municipal Corporation (“NMC”). The issue will be used to partly finance the Nagpur Water Supply Scheme Pench – IV under the Jawahar Lal Nehru National Urban Renewal Mission (“JNNURM”). The rating is based on the proposed structured collateral agreement between the trustees to the bondholders of the proposed issue, the NMC, the designated bank, and Bank of Maharashtra (“BoM”), with which the NMC maintains a collection account for all its property tax revenues. The agreement envisages NMC creating a no-lien escrow account with the designated bank into which it will daily transfer all property tax collected by the NMC until the amount can meet the annual interest and sinking fund payments, 60 days before such payments are due. In the event of a shortfall, if the shortfall in the transfer to the escrow account is not remedied seven weeks before the payment is due, all the collections from property tax will be directly deposited in the escrow account instead of the collection account. The interest and/or principal payment cheque will be dispatched to the investors seven days before the due date of the payment.

NMC will furnish an undertaking to Fitch that they will not provide additional escrow on the property tax collections other than that specified in this transaction structure.

NMC and the trustees will certify to Fitch that it is in compliance with the implementation of the above structure within 60 days of closure of the issue, after which the agency will ratify the expected rating assigned upon reviewing the trust deed and other transaction documents.

Property tax constitutes the second biggest source of NMC’s revenues, after Octroi (a tax levied on goods entering the City), yielding 19.4% of the total operating revenues for FY06. There has been a steady year-on-year increase in property taxes collected in absolute terms – a modest CAGR of 4.4% during FY03-FY06. Fitch believes that in the years to come, a number of measures that NMC has embarked on should result in continued buoyancy in property tax collections.

The NMC is governed by the city of Nagpur Corporation Act, 1948, as amended. The 74th Constitution Amendment Act, 1992, gives Indian local bodies a constitutional status and assigns to them a large number of functions. NMC is responsible for providing infrastructure in the city of Nagpur. The city has formulated an INR58.94 billion city development plan under the JNNURM programme, which will be executed by the NMC in conjunction with other local agencies. The NMC will need to generate INR5.94bn, internally and/ or through borrowings to finance the plan. Substantial capital expenditure – mainly under the JNNURM programme - planned by the NMC could necessitate increasing levels of borrowing, particularly if some of the aggressive revenue forecasts do not materialise, affecting the underlying credit quality.

Nagpur is the winter capital of Maharashtra and is famously known as the orange city. It houses 2.05 million people and on the basis of population, it is 13th and third biggest municipality in the country and state of Maharashtra respectively. Nagpur has high levels of literacy (84%) and nearly two-third of the population is under 40 years of age; the 10-25 year age group forms the largest proportion of the total population. With favourable education levels and an economically active population, the city holds immense potential for economic development.

Agro-processing, steel and allied industries, textiles, transportation and IT are some of the industries that can drive the economy of the city and its surrounding regions. The Multimodal International Hub Air Port (“MIHAN”) project is expected to galvanise several economic activities in the region and also market the latent economic potential of in the city. NMC also has an important role to play in nurturing an environment, which is conducive to business.

NMC has a consistent track record of generating revenue surpluses. During FY06, it reported an operating surplus of INR 585 mn on a total revenue of INR3016m. Octroi contributes to more than half of the Corporation’s revenues. It generates a high proportion of its revenues from own sources and dependence on grants has been minimal.

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.

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