Road construction takes place near the IL&FS building in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Liquidity Issues At IL&FS Credit Negative For Banks, Debt Markets, Says Moody’s

Liquidity issues being faced by Infrastructure Leasing & Finance Services Ltd. are credit negative for Indian banks and the debt markets, said global rating agency Moody’s Investors Service in a note on Wednesday.

IL&FS, an infrastructure conglomerate with wide spread operations, has defaulted on some of its debt obligations, resulting in a sharp cut in its credit rating. Some of the group’s subsidiaries have also faced similar troubles and rating downgrades, impacting mutual funds along with insurance and pension funds adversely.

Moody’s pointed out that the troubles faced by the IL&FS group would also impact banks. Banks' exposure to ILFS's weak road projects may not have been recognized as non-performing loans so far on account of an expectation of parental support, the rating agency said.

It added that the group’s complex corporate structure could result in a high variation of ultimate losses across banks depending on where the banks' specific exposures lie.

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.
Moody’s Investors Service

However, the rating agency added that the debt incurred by the infrastructure financier in the form of bank loans accounted for around 0.5-0.7 percent of the total banking system loans. It does not expect exposure of any rated bank to exceed 2 percent of its loan book.

Also read: As Debt Woes Spread, India's IL&FS Ratings Cut to Lowest Levels

Liquidity Issues At IL&FS Credit Negative For Banks, Debt Markets, Says Moody’s

Moody’s further warned that the group repayment risks would remain significant due to 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 9.8 times. The leverage at IL&FS Transportation Networks is also high at 7.2 times,” it said.

IL&FS is in the process of monetising some of its assets. It is also trying to conclude a rights issue and secure a line of credit from its shareholders.

However, the company, which plans to raise funds may have to wait at least for a month, as its board requires investor's approval to increase the capping for the debt and equity capital at the forthcoming annual general meeting on Sept. 29, two people aware about the developments told BloombergQuint on Sept. 16.

The Reserve Bank of India has also initiated a special audit on the infrastructure financer after it defaulted on about Rs 250 crore worth of inter-corporate deposits to Small Industries Development Bank of India (SIDBI), an unidentified source, directly familiar with the matter told BloombergQuint. The company further defaulted on inter-corporate deposits worth Rs 150 crore to SIDBI, therefore taking its total default on inter-corporate deposits stands at Rs 450 crore, a banker, aware of the development told BloombergQuint on Sept. 14 the condition of anonymity.

Also read: Shareholders Ask IL&FS To Raise Funds By Selling Assets, Non-Core Business

Liquidity Issues At IL&FS Credit Negative For Banks, Debt Markets, Says Moody’s