IL&FS liquidity crisis credit negative for banks, debt market: Moody's

Sounding a warning on liquidity crisis at IL&FS group, global rating agency Moody's on Wednesday said it is credit negative for banks and debt market in India. The defaults would impact mutual funds, pension funds and insurance companies. 

One particular asset challenge for banks in a potential ILFS default comes from the Company's complex corporate structure. This could result in high variation of ultimate losses across banks depending on where the banks' specific exposures lie, Moody's said in a statement.

Now the group flagship — IL&FS, and key group entities carry either default "D" grade or sub-investment grade rating.

ILFS 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 of 31 March 2018, debts incurred by ILFS in the form of bank loans accounted for around 0.5 per cent - 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", rating agency said.

The consolidated debt of flagship - IL&FS is Rs 910 billion.

These securities issued by group entities carried high investment grade ratings. That met the holding eligibility criteria for most of the institutional investors like mutual funds, pension funds and insurance companies. Hence, a default on these instruments could affect a wide range of market participants.

On 10 September 2018, infrastructure company Infrastructure Leasing & Finance Services defaulted on a repayment of Rs one billion to the Small Industries Development Bank of India (SIDBI, not rated). This came after a series of defaults starting on 28 August 2018, when ILFS Financial Services, one of its main subsidiaries, delayed repayment of some of its commercial paper obligations.

ILFS Financial Services has since been barred from accessing the commercial paper market until February 2019.

The main shareholders of the group have strong financial standing. However, so far, there has been no publicly declared commitment of specific support from the main shareholders. 

Life Insurance Corporation of India, Orix Corporation of Japan and State Bank of India, Central Bank of India are amongst key shareholders of IL&FS.

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 ILFS Transportation Networks, one subsidiary, is also high at 7.2x.

As of 31 March, ILFS had outstanding debentures and commercial papers, which accounted for 1 per cent and 2 per cent, respectively, of India's domestic corporate debt market.