Employees, blurred in a long exposure, walk through a rest area at the Tata Consultancy Services Ltd. (TCS) campus (Photographer: Dhiraj Singh/Bloomberg)

Wealth Managers With Exposure To Junk-Rated IL&FS And Its Subsidiaries

Infrastructure Leasing & Financial Services Ltd., the unlisted parent to a group of companies in various infrastructure verticals, lost its investment grade rating after ICRA downgraded its debt by several notches in one go.

On Saturday, BloombergQuint reported that 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.

IL&FS’ bonds and loans have been downgraded by ICRA and Care Ratings to BB (junk or non-investment status) from AA+ while the rating for its commercial paper has been cut to A4 from A1 plus. ICRA, in its release, said, “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.”

Since mid-August four arms of IL&FS have been downgraded to non-investment grade. The parent IL&FS was downgraded by ICRA and Care Ratings in the last two days.

IL&FS has Rs 2,500 crore worth of rated commercial paper, of which Rs 2,020 crore was outstanding as of July end, subscribed mainly by mutual funds and companies, according to CARE Ratings. Around 12 asset management companies have exposure to various papers issued by the IL&FS group, Bloomberg data showed.

Here are the seven group companies that have raised funds through NCDs and commercial papers:

  • IL&FS Financial Services Ltd. (Downgraded by ICRA)
  • IL&FS Transportation Networks Ltd. (Downgraded by ICRA)
  • IL&FS Wind Energy Ltd.
  • IL&FS Energy Development Co Ltd. (Downgraded by Care Ratings)
  • IL&FS Education & Technology Services Ltd.
  • IL&FS Tamil Nadu Power Co Ltd.
  • IL&FS Engineering and Construction Company Ltd. (Downgraded by Care Ratings)

Here are the asset management companies with exposure to IL&FS and its subsidiaries:

DHFL Pramerica which had an exposure of Rs 25 crore, exited the investment in July, the asset manager said in a statement to BloombergQuint. UTI Mutual Fund, in its response, said it doesn’t have any direct investment in IL&FS, but had an exposure of Rs 37.5 crore in the group subsidiary ITNL Ltd.

Aditya Birla Sun Life has exposure to three IL&FS group projects—Tamil Nadu power plant, education special purpose vehicle in three states and a road project in Jharkhand, the fund house said in a statement, adding that its receivables are secured against cash flows. Moreover, the Jharkhand asset has a secured annuity income from the state government and should not be treated as a direct exposure to IL&FS, it said.

Other funds are yet to respond to BloombergQuint’s emailed queries.

According to SEBI norms, if rating of an investment falls below the investment grade, ie: below BBB, then fund houses are supposed to take a 25-percent mark-down on the value of the investment.

Mutual funds have a limited exposure to IL&FS group of around Rs 3,500 crore, so no individual fund will be hurt very badly, Dhirendra Kumar, founder and chief executive officer of Value Research, told BloombergQuint over the phone.

The problem is that mutual funds always suffer for a very different reason. They suffer because of stampede as investors start withdrawing, and that causes greater disruption and dislocation.
Dhirendra Kumar, Founder and CEO, Value Research

The breakup of individual fund houses’ exposure to IL&FS group:

*Updated to reflect the current exposure of Asset Managers.