ICRA’s rating on IL&FS to hit debt mutual funds; what led to 9-notch fall to junk status

By: | Published: September 10, 2018 1:04 PM

After rating agency ICRA downgrade the loans and bonds of Infrastructure Leasing & Financial Services (IL&FS), debt mutual funds are seen to bear the brunt. We take a look at what led to the downgrade.

ICRA has downgraded IL&FS bonds and long term loans to BB from AA+, a fall of 9 notches from investment grade to junk status.

After rating agency ICRA downgrade the loans and bonds of Infrastructure Leasing & Financial Services (IL&FS), debt mutual funds are seen to bear the brunt. The rating agency has downgraded IL&FS bonds and long term loans to BB from AA+, a fall of 9 notches from investment grade to junk status. “The downgrade of ratings takes into account the increase in liquidity pressure at the group level,” ICRA said. Notably, around 12 asset management companies have exposure to various papers issued by the IL&FS units. In an interview to CNBC TV18, Aditya Birla Sun Life AMC said that mutual funds have exposure of Rs 7,500 crore, while banks have an overall exposure of Rs 60,000 crore to IL&FS. ICRA’s downgrade of IL&FS has come as a shock to the fin services industry, noted the firm.  

What exactly led to the downgrade? “The rating revision is driven by the material weakening of the company’s liquidity profile in light of the sizeable debt servicing obligations coupled with the diminishing expectation of funding support from the promoter, namely, IL&FS,” ICRA noted in a release. IL&FS management held a meeting on Friday in which it was decided to t has decided to seek short-term loans of Rs 3,000 crore from LIC and the State Bank of India, two existing stakeholders in the group.

“While the company is in the process to raise Rs. 8,000 crore of funds from the promoter group (through a mix of rights issue and long term line of credit), timely receipt of the same is important to improve the group’s overall liquidity profile,” the rating agency noted.

According to media reports, the RBI has initiated a special audit of IL&FS after it defaulted on repaying about Rs 250 crore worth of inter-corporate deposits of Small Industries Development Bank of India (SIDBI). “Tomorrow is going to be a weird day in mutual funds. Debt funds,” Deepak Shenoy of Capital Mind said on Twitter yesterday, taking stock of ICRA’s downgrade. Notably, the development is expected to see most fund houses marking down their net asset values (NAV) when they declare them on Monday as the downgrade came during the weekend.

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