The downgrade of the credit rating of India's largest infrastructure development and finance company, IL&FS Group, to junk has put INR100bn ($1.4bn) worth of investments by insurers and pension funds at risk.
Of the company’s standalone outstanding borrowing of more than INR165bn as of May 2018, about 60% are through non-convertible debentures, reports BloombergQuint citing filings with the Registrar of Companies. Nearly all these instruments, the documents show, are subscribed by insurers and provident and pension funds, including LIC, General Insurance Corporation and the National Pension Scheme Trust.
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’.
Mr SC Khuntia, IRDAI chairman, said that when there is a downgrade in the ratings of a company, an insurer should not invest in it.
They should “withdraw that investment and put it somewhere else”, he said on the sidelines of a pensions conference last week. “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.”
Still, the investors may not be able to exit 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 Four accounting firms told Bloomberg Quint requesting anonymity. Provident funds are also required to follow similar impairment guidelines, the person said.
Meanwhile, at an emergency board meeting of the company last Saturday, the board discussed strategies for raising funds to meet the cash crunch. LIC is reported to have agreed to subscribe to a forthcoming rights issue of IL&FS and extend an immediate working capital loan.
IL&FS is building the country’s longest tunnel—the Chenani-Nashri tunnel (9.2km) in Jammu and Kashmir—but is struggling to repay its debt.
According to its annual report, around INR57.56bn worth of debt is coming up for repayment in the next one year for IL&FS. At 31 March, IL&FS’ total outstanding loans stood at INR910.9bn, according to the annual report.
LIC holds 25.34% in IL&FS, while HDFC has 9.02%, Central Bank of India holds 7.67% and State Bank of India owns 6.42%. ORIX Corp of Japan and Abu Dhabi Investment Authority have 23.54% and 12.56% stake in IL&FS, respectively.
IL&FS defaulted in recent months on repayments of INR3.5bn worth of inter-corporate deposits to Small Industries Development Bank of India (SIDBI), prompting the Reserve Bank of India to initiate an audit of the group, reports Bloomberg Quint. IL&FS had another such payment worth INR1.50bn due on 14 September.
The default was followed by a ratings downgrade by rating agencies ICRA and CARE. 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. The downgrades to junk grade makes it difficult for the company to raise money.
IL&FS, which has over 170 direct and indirect subsidiaries, plans to reduce its debt burden by up to INR300bn by selling assets in the next 18 months.