On September 8, ICRA downgraded Rs. 6,500 crore worth of short-term commercial papers of IL&FS from [ICRA]A1+ to [ICRA]A4 and Rs. 5,225 worth of NCD (non-convertible debentures) from [ICRA] AA+ to [ICRA] BB. The rating agency attributed this sharp downgrade to material weakening of the company’s liquidity profile. While ICRA acknowledged IL&FS’s plans of raising Rs. 8,000 crore of funds from the promoter group, it mentioned that there wasn’t enough clarity on the timing of the inflows.
The rating revision has relegated IL&FS’s debt papers from investment grade to below junk or non-investment grade. As per SEBI circular, ‘all non-investment grade performing debt securities have to be valued at a discount of 25% to the face value.’ Consequently, fund houses having exposure to these securities are required to revalue them in their portfolios.
As per currently available August end portfolio data, mutual funds have over Rs. 2,400 crore worth of exposure in IL&FS securities and its subsidiaries. The investments are spread across credit risk funds, liquid funds, FMPs, medium term funds, money market funds, short-term funds and hybrid funds.
Analysing investments made in IL&FS and its subsidiaries by different fund houses, we observe that so far, the rating downgrade is limited to only the parent company and select subsidiaries namely IL&FS Financial Services Ltd., IL&FS Energy Development Co. Ltd., IL&FS Transportation Networks Ltd. Meanwhile IL&FS Securities Services Limited, IL&FS Tamil Nadu Power Co. Ltd. and IL&FS Education and Technology Services Ltd. have maintained their investment grade status.
Lakshmi Iyer CIO (Debt) and Head Products at Kotak MF mentioned that IL&FS has made its interest rate payments today as per schedule. “While fund houses holding the downgraded securities in their portfolio will be revaluing them as per SEBI guidelines, today the fixed income markets reacted more sharply to the Rupee depreciation than the IL&FS rating downgrade,” she added.
