IL&FS crisis, India's Lehman Bros moment, unleashes crackdown, watchdog unveils 10-pt list

In the ongoing crisis Infrastructure Leasing and Financial Services Ltd (IL&FS) is engulfed in, market regulator Sebi has taken stringent steps and asked credit ratings agencies to follow instructions. The watchdog has rolled out a list of norms that a credit rating agency must follow while giving an outlook over any company. It is being believed that, rating agencies had failed to warn investors through their outlook in IL&FS earlier. The result is investors are trapped as well in the breakdown of IL&FS and its subsidiary. IL&FS has stolen the limelight and it can be said that there are similarities between this company and Lehman Brothers.

Here’s a list of 10 key things that, the regulator imposed on credit rating agencies. 

1 When a rating factors in support from a Parent/ Group/ Government,with an expectation of infusion  of  funds  towards timely  debt  servicing, the name of such entities,along with rationale for such expectation, may be provided.

2 When  subsidiaries  or group  companies  are  consolidated  to  arrive  at  a rating,  list  of  all such companies,along with  the  extent  (e.g.  full, proportionate  or  moderate)and  rationale  of  consolidation, may  be provided. 

3 The Press Release shall include a specific section on “Liquidity”, which shall highlight  parameters  like  liquid  investments  or  cash  balances,  access  to unutilised  credit  lines,  liquidity  coverage  ratio,adequacy of cash flows  for servicing maturing debt obligation, etc. CRAs shall also disclose any linkage to external support for meeting near term maturing obligations. 

4 While carrying out“Monitoring of Repayment Schedules”, CRAs shall analyse the  deterioration  in the  liquidity  conditions  of  the  issuer  and  also  take  into account any asset-liability mismatch.

5 While reviewing “Material Events”,CRAs may treat sharp deviations in bond spreads of debt instruments vis-a-vis relevant benchmark yield as a material event.

6 In order to promote transparency and to enable the market to best judge the performance of the ratings, the CRA should publish information about the historical average rating transition rates across various rating categories, so that investors can understand the historical performance of the ratings assigned by the CRAs. 

7 Accordingly, CRAs shall publish their average one-year rating transition rate over a 5-year period, on their respective websites, which shall be calculated as the weighted average of transitions for each rating category,across all static pools in the 5-year period. 

8 Each CRAs hall furnish data on sharp rating actions in investment grade rating category, as per the format specified, to Stock Exchanges and Depositories for disclosure on website on half-yearly basis, within 15 days from the end of the half-year (31st March/30th September). 

9 CRAs  may  review  their rating criteria with  regard  to  assessment  of  holding companies and subsidiaries in terms of their inter-linkages, holding company’s liquidity, financial flexibility and support to the subsidiaries, etc. 

10 Ratings outstanding for each category at the beginning of any financial year.However, it shall exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year. Ratings downgraded to D shall be treated as default for the rest of  the  financial  year.

Currently both RBI and Indian government are looking to find a solution to IL&FS even as its impact on markets has been massive. 

IL&FS has turned into a defaulter on few payments and failed to service its commercial papers on due date.

ILFS Financial Services has since been barred from accessing the commercial paper market until February 2019. 

Adding to their woes, there is a slowdown in infrastructure projects and disputes over contracts which has locked the company in Rs 90 billion of payments due from government which has just added more fuel to their problems. 

Not only, the company has a huge chunk of debt which needs to be paid back in near-term, while the revenue from its assets are skewed for longer term. 

As per a Care Ratings agency, IL&FS and IL&FS Financial Services had a combined Rs 270 billion of debt rated as junk. 

Knowing that IL&FS has about 256 subsidiaries, joint venture companies and associate entities, the quantum of loss is worrisome for India and investors.