Ind-Ra downgrades IL&FS Financial Services on liquidity pressures

India Ratings and Research (Ind-Ra) Tuesday downgraded the long-term issuer rating on IL&FS Financial Services to 'IND C' due to liquidity pressure posing serious challenges to meet debt obligations.

Ind-Ra has downgraded IL&FS Financial Services' (IFIN) long-term issuer rating to 'IND C' from 'IND AA' and short-term issuer rating to 'IND A4' from 'IND A1+', while resolving the Rating Watch Negative (RWN), the agency said in a statement.

The downgrade reflects the sharp liquidity tightness at both the parent IL&FS and IFIN levels, which poses critical challenges to their ability to meet their immediate debt liabilities, Ind-Ra said.

The rating agency said IL&FS struggles for liquidity which so its ability to support IFIN's obligations immediately is "modest" at the best.

"Additionally, while IFIN faces regulatory constraints in accessing the commercial paper market, Ind-Ra believes there may not be sufficient appetite in the banking or capital markets to lend to IL&FS group without clear visibility on funding support from their shareholders.

"IFIN's ability to bring down its group exposure within the regulatory limits could also face challenges and it may be required to take haircuts on both its group and external exposures. This would aggravate the already high leverage situation," Ind-Ra said.

On the key rating drivers, it said the liquidity situation at IFIN has significantly weakened since March 2018 as the contractual debt repayment (principal plus interest) obligations for September 2018 stands at Rs 17.2 billion (2HFY19: Rs 37 billion) as against the on-balance sheet liquidity of Rs 2 billion.

"The liquidity situation has worsened due to the delayed repayments of the loans extended to group companies, which is 29 per cent of the total credit exposure at FY18. Furthermore, the ability of parent to support IFIN's payment obligations has deteriorated considerably," the agency said.

There have also been delays in the mobilisation of the much-needed long-term debt which is critical in restoring the liquidity situation, it added.

On regulatory overhang to reduce group exposure, it said IFIN's exposure to the group companies over Rs 50 billion as of March 2018 needs to be significantly brought down by March 2019.

However, this is subject to the planned injection of equity by IL&FS' shareholders as well as the timely divestment of assets at the operating companies of the group.

Also, it said that deleveraging could be challenging for the company.

"IFIN's financial leverage is higher than its peers', which the company plans to address through a combination of paring group companies' exposure and equity infusions. The execution of this plan is critical and involves timely injections of equity and liquidity from its shareholders," the rating agency said.

On the rating sensitivities, it said the ability of IFIN to manage its obligations over the next few weeks and couple of months would remain a key rating trigger.

Funding support in the required quantum and timelines could be a rating positive.

IFIN is a systemically important non-banking finance company that provides credit and other services such as debt syndication and corporate advisory.

Earlier on Sunday, ICRA downgraded the rating on loan and debentures of IL&FS to default risk citing liquidity pressure due to sizeable repayment obligations.

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