MUMBAI: Global ratings agency Moody’s said IL&FS Group’s liquidity crisis is credit negative for banks and the Indian debt market in general. It added that defaults would impact mutual funds, pension funds and insurance companies.
“One particular asset challenge for banks in a potential IL&FS default comes from the company’s complex corporate structure, which could result in a high variation of ultimate losses across banks depending on where the banks’ specific exposures lie,” Moody’s said in a statement.
It added that IL&FS has a complicated structure, with the holding company at the top owning stakes in its financial services arm as well as in multiple subsidiary companies that operate its infrastructure assets. As on March 2018, debts incurred by IL&FS in the form of bank loans accounted for about 0.5-0.7 per cent of overall banking system loans.
“We do not expect the exposure of any rated bank to exceed 2 per cent of its loan book,” Moody’s noted. The consolidated debt of the flagship entity IL&FS is about Rs 91,000 crore.
Both IL&FS and key group entities carry either default ‘D’ grade or sub-investment grade rating, down from the high investment grade ratings they earlier had. This, in turn, met the holding eligibility criteria for most of the institutional investors like mutual funds, pension funds and insurance companies. So, a default on these instruments could affect a wide range of market participants.
Now, IL&FS Financial Services has since been barred from accessing the commercial paper market until February 2019. Recently, ILF&S defaulted on a repayment of Rs 100 crore to SIDBI, which follows a series of defaults starting on August 2018, when IL&FS Financial Services, one of its main subsidiaries, delayed repayment of some of its commercial paper obligations.
According to Moody’s, the group’s repayment risks will remain significant because of the weakening of its credit metrics. “Over the last decade, debt in the group has increased significantly on account of significant investments in new infrastructure ventures.
This is reflected in the group’s overall leverage of 9.8x. The leverage at another subsidiary IL&FS Transportation Networks is also high at 7.2x,” it explained. As on March, IL&FS had outstanding debentures and commercial papers, which accounted for 1 and 2 per cent respectively, of India’s domestic corporate debt market.