IL&FS downgrade will immediately impact funds that hold the bonds as they have to mark it down to default, which means a steady write off of the value of the bonds. NAV’s of funds that hold the bonds will fall. However, going forward, if and when ILFS manages to raise funds from LIC and SBI. repay loans and restructure debt, the ratings will improve. Liquidity in IL&FS bonds and its subsidiaries will completely vanish even if there is a longer-term potential if promoters pledge support, as the whole business undertakings of ILFS is under a cloud. Spreads will rise substantially and that by itself will impact funds that hold the bonds, even if ratings are upgraded down the line.
A few months back IL&FS was rated AAA (highest rating) and in August 2018, its rating was downgraded to AA+ and on 8th of September, its rating was downgraded to BB (junk). Rating agency ICRA has downgraded IL&FS rating to BB, while it cut the rating for the commercial paper on to A4 from A1+.
ICRA in its rating report mentioned the rating revision is driven by the material weakening of the liquidity profile in light of the sizeable debt servicing obligations. While the company is in the process to raise Rs 80 billion of funds from the promoter group, timely receipt of the same is important to improve the group’s overall liquidity profile. Ratings also consider the company’s elevated debt levels owing to the funding commitments towards Group ventures coupled with slow progress on asset monetization (While the IL&FS group has been trying to monetize a number of businesses and projects under its umbrella, progress has been slow, leading to an increase in leverage.) and deterioration in the credit profile of key investee companies.
RBI has also initiated a special audit on IL&FS after they defaulted on repaying about Rs 2.5 billion worth of inter-corporate deposits to SIDBI. SIDBI has inter-corporate deposits worth Rs 5 billion with IL&FS and an additional deposit worth Rs 5 billion parked with its NBFC arm, IL&FS Financial Services Ltd. The deposits parked with IL&FS Financial services are due in November.
With the parent IL&FS being downgraded, there is a risk of lower ratings for its subsidiaries as well – IL&FS Transportation, IL&FS Tamil Nadu Power, IL&FS Energy Development, IL&FS Security Services (sold to IndusInd Bank) and IL&FS Financial Services.
