IL&FS credit downgrade: Important things you should know

Publish Date: September 12, 2018

Infrastructure Leasing and Financial Services’ (IL&FS) bonds and long-term loans were downgraded to junk status by ratings agency ICRA last week.

ICRA’s downgraded the company’s Rs 4,800 non-convertible debentures from AA+ to BB over the weekend. The BB rating suggests that IL&FS debt is now considered to have a moderate risk of default when it comes to timely servicing of interest payments and principal repayments.

The company’s Rs 350 crore commercial papers--short-term debt instruments--were revised as well. Its fall from A1+ to A4 suggests high credit risk and that the company is prone to default.

Reasons for IL&FS credit revision

An official note from credit agency ICRA stated that “significant deterioration in the liquidity profile of the company” has resulted in the recent downgrade. The “delay in fundraising plans” was another reason for the revision.

The IF&LS is in dire need of fresh capital. Its infrastructure arm has seen its asset quality worsen in the last two years. Care Ratings suggests that the company’s loan book has worsened in the last 12 months, with its NPA ratio rising from 2.36% a year back to 3.49% now.

ICRA also stated that the company’s high debt levels mean that it would it difficult to meet its financial obligations. An Economic Times (ET) article on September 7 reported that IL&FS has paid only 20% of Rs 250 crore-worth term deposits to Small Industries and Development Bank of India (SIDBI). The default coerced SIDBI to approach the central bank for help.

Impact on mutual fund houses

The mutual fund industry will be hit hard as fund houses’ overall exposure to the company is almost Rs 3,500 crore, as per a Value Research data.

The downgrade of bonds and long-term loans to junk means that most fund houses have been forced to mark down its net asset value this week, which means that investors have lost money An ET report states that as many as 35 mutual fund schemes will be directly impacted by the credit revision.

Fund houses like LIC Mutual Fund, Motilal Oswald Mutual Fund, Tata Mutual Fund, ICICI Prudential Mutual Fund and Principal Mutual Fund are part of the collateral damage. These fund houses have a total exposure of Rs 1,225.25 crore towards the company’s debt papers.

Impact on banks

IL&FS has borrowed nearly Rs 57,000 crore through bank loans. Of them, nearly 70% of the debt is held by public sector banks, while private banks hold less than 10% of the loan. LIC and foreign banks have the remaining 20%.

Nomura India believes that while Axis Bank and YES Bank have limited exposure to the loans, Punjab National Bank, Bank of Baroda and Union Bank have “relatively high exposure” to the company’s loan book.

Reaction to the downgrade

The company’s share price hit a 52-week low, plummeting from Rs 30.20 on September 7 (3.30pm) to Rs 24.50 on September 12 (1.30pm).

The company’s top management has decided to meet on September 15 to decide how to raise Rs 3,000 crore from LIC--they hold more than 25% stake in the company--and SBI (6.42% stake), according to a Bloomberg report. It will use the money to repay SIDBI and inject confidence on the Street. The company has also approached its shareholders to raise Rs 5,000 crore to ease the deepening liquidity crisis.

The positive is that most of the important shareholders--LIC and SBI--have agreed to help the company. The company is also looking to sell a few road portfolios to reduce its debt over the next few months.

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