Infrastructure Leasing and Financial Services Ltd (IL&FS) is turning out to be a lesson in the making for rating agencies and even shareholders.
To begin with, the three rating agencies — ICRA, India Ratings and Research and Brickwork Ratings—which rate the infrastructure lender’s commercial papers (CPs), seem to have overlooked the liquidity crisis plaguing IL&FS and its ripple effects on the debt and equity markets.
Despite a delay in repayment of Rs 100 crore-commercial paper of the infrastructure lender’s arm IL&FS Transportation Networks Ltd (ITNL), rating companies did not assign a 'default' rating.
Stakeholders and market experts are pointing fingers at the firms for ignoring the first signs of trouble.
"There should be a howler against the rating agencies. How can you downgrade from AA to BB and not have noticed the strain beforehand? Additionally, what were the promoters and shareholders waiting for? They should also have sensed the trouble," said the chief of a pension fund company.
The three rating firms downgraded the debt instrument of IL&FS and the group firms they rate between May and July and none of them assigned a default status citing strong state-owned promoters and shareholder backing.
India Ratings downgraded the CPs to A4+ from A1 on July 25, Brickwork Ratings downgraded them to A2+ from A1 on June 22 and ICRA downgraded the paper to A2+ from A1 on May 26. It was only after the first default in early September that the 'default' rating was finally assigned.
On June 22, ITNL informed the stock exchange about a delay in funding investor account relating to redemption of CP due on June 21.
Since over two years, infrastructure sector has been witnessing major stress in the financial sector with the banking industry being impacted the most. Majority of the 11.6 percent non-performing assets (NPAs) worth about Rs 10.5 lakh crore come from the infrastructure sector. Why should a non-banking financial company (NBFC) remain insulated from the stress?
Also Read: Debt and defaults: What happened to IL&FS?
Rating agencies blame promoters for inaction
Moneycontrol spoke to two of the three rating agencies and got similar responses as reasons for skipping the default rating previously.
“Expectation was that there are large reputed shareholders and they are aware of what happens in a company on a regular basis…Banks also have difficulties but the government has pumped in money and bailed them out. Now, for whatever reasons, the promoters which are big names like LIC and SBI, they have not done that,” said a visibly anguished analyst with one of the agencies.
The analyst also adds, “Today banks also have difficulties but government has pumped in money and bailed them out. Now, for whatever reasons the promoters which are big names like LIC (Life Insurance Corporation of India) and SBI (State Bank of India), they have not done that… I believe, shareholders’ behaviour should have been much more active and serious.”
LIC is the largest shareholder in IL&FS with 25.34 percent and SBI owns 6.42 percent.
Private shareholders include Japan’s Orix holds 23.54 percent stake in IL&FS while Abu Dhabi Investment holds 12.56 percent. Housing Development Finance Corporation (HDFC) owns 9.02 percent and Central Bank of India owns 7.67 percent.
Another analyst with the second rating agency said, “As far as ratings are concerned, the view taken was that in the process of downsizing or surrendering the road projects to NHAI (National Highways Authority of India), other asset monetisation plans, etc…during the debt servicing time, it was expected that the shareholders will pump in money.
“We thought the group will have enough financial flexibility and promoters will come forward. Even Tata group firms faced liquidity crunch, (but) their promoter does step in. That is where the reading of rating agencies went wrong,” he added.
A day before the annual general meeting (AGM) of IL&FS, the Reserve Bank of India (RBI) also raised concerns about the ongoing debt crisis in the group in a meeting with large shareholders on September 28.
The banking regulator has initiated a special audit, given the potential systemic risk the group poses to its other non-bank lenders after IL&FS defaulted on its Rs 450-crore inter-corporate deposits (ICDs) raised from state-owned Small Industries Development Bank of India (Sidbi).
On the learning, one of the analysts quoted above said, “Firstly, I think the size of the debt has become too big. We should monitor these financials too closely irrespective of the ownership.
"Secondly, organisation structure of IL&FS has become very complex and such structures lead to weakening of management oversight given the complexity of it. Now, I think things should be simpler.
"Thirdly, infrastructure has also faced difficulty and so their credit structures should be on the lower side as of now.”
Since 2015, the group’s debt burden has jumped 44 percent as on March 31 this year.
IL&FS’s total outstanding debt was Rs 91,091.31 crore at the group level, with most of the operating assets with its subsidiaries.
It remains to be seen if the credit rating agencies will face scrutiny or will the government gulp down the bitter bail-out pill and act more responsible as shareholders and promoters.
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