A customer counts Indian one-hundred rupee banknotes. (Photographer: Dhiraj Singh/Bloomberg)

What’s At Risk For Insurers, Pension Funds After IL&FS Downgrade 

Infrastructure Leasing & Financial Services Ltd.’s downgrade to junk has put Rs 10,000 crore worth of investments by insurers and pension funds at risk.

Of the company’s standalone outstanding borrowing of more than Rs 16,500 crore as of May, about 60 percent is through non-convertible debentures, according to filings with the Registrar of Companies. Nearly all these instruments, the documents show, are subscribed by insurance companies, and provident and pension funds, including Life Insurance Corporation of India, General Insurance Corporation Ltd. and the National Pension Scheme Trust.

IL&FS’s non-convertible debentures and commercial paper were downgraded to junk after it missed repayment to Small Industries Development Bank of India Ltd., prompting a special audit by the central bank. Regulatory norms allow insurance and pension funds to only invest in the paper of companies operating in infrastructure and social sectors with a minimum rating of ‘AA’.

SC Khuntia, chairman of the Insurance Regulatory and Development Authority of India, suggested that insurers shouldn’t continue with investments in junk-rated paper. When there is such a downgrade, they should “withdraw that investment and put it somewhere else”, he said at an event. “They [investing companies] will have to find their own time to do that; and that’s what a prudent entity should do and is expected of them.”

For the Pension Fund Regulatory and Development Authority, it’s unprecedented. The regulator hasn’t faced such a situation of a “sudden downgrade to junk status”, Hemant Contractor, chairman at PFRDA, said, adding that he is not sure which funds “have investments in IL&FS”.

But if we were to face a situation like this, what we will probably do is that because our combined investment is quite large, we will open a dialogue with the promoters and try to see how best they could redeem the bond or, at least, pay up whatever is due.
Hemant Contractor, Chairman, PFRDA

Still, the companies may not be able to exit such investments immediately. Till then, a downgrade to non-investment grade requires insurers to first determine and then record the erosion in the value of the investment in the profit and loss account; or adjust the net asset value of the scheme in case of a unit-linked plan, an insurance consultant with one of the Big 4 accounting firms said requesting anonymity. Provident funds are also required to follow similar impairment guidelines, the person said.

LIC said it will strictly follow the IRDAI and the Reserve Bank of India rules to value IL&FS investments. Other insurers and pension funds were not immediately reachable. Emailed queries to IL&FS remained unanswered.

More Repayments Draw Near

IL&FS defaulted on payments on Rs 350 crore worth of inter-corporate deposits to SIDBI. IL&FS has another such payment worth Rs 150 crore due on Sept. 14, Bloomberg reported citing unnamed people. In all, the company’s filings show, about Rs 5,756 crore worth of debt is coming up for repayment in the next one year.

IL&FS is looking to mop up funds to repay its obligations. Its board is scheduled to meet on Sept. 15 to seek approval for raising a Rs 3,000-crore loan from two of its shareholders—Life Insurance Corporation of India and the State Bank of India Ltd.

According to Care Ratings, the company has plans to raise nearly Rs 8,000 crore—Rs 4,500 crore through a rights issue by September-end and Rs 3,500 crore in line of credit—from its promoter entities for meeting near-term liquidity needs.

IL&FS Debt Burden

The company’s standalone debt of over Rs 16,506 crore implies a leverage of 3.04 times as of March this year compared with 2.23 times a year ago. Its consolidated leverage had risen to more than 9 times at the end of March.

Rs 91,000-Crore Group Debt

  • IL&FS is the holding company of the group with 24 direct subsidiaries and 135 Indirect subsidiaries.
  • On a consolidated basis, the company closed the financial year 2017-18 with a revenue of Rs 18,798.78 crore and a loss of Rs 1,886.85 crore.
  • The group’s consolidated debt increased by Rs 11,211 crore in financial year 2017-18 to Rs 91,091.30 crore as of March 2018, according to its filings with the Registrar of Companies. Nearly, 82 percent or Rs 74,591 crore of it is contributed by its subsidiaries.
  • The company provided just Rs 800 crore or 5 percent of loans and investments as general contingency as of March 2017, according to its filings.

Five subsidiaries account for nearly two-thirds of the group’s debt, according to the filings. These are:

  • IL&FS Energy Development Company Ltd.
  • IL&FS Transportation Networks Ltd.
  • IL&FS Engineering and Construction Company Ltd.
  • IL&FS Maritime Infrastructure Company Ltd.
  • IL&FS Financial Services Ltd.

Barring IL&FS Maritime, the other four were downgraded to non-investment grade.

* Updated for 2017-18 consolidated numbers.