CARE Ratings has downgraded its rating on Rs4,800 crore non-convertible debentures (NCD) of IL&FS Financial Services Ltd (IFIN) to 'BB' from 'AA+' while keeping the ratings on credit watch with negative implications. Instruments with ‘BB’ rating are considered to have moderate risk of default regarding timely servicing of financial obligations, while those with ‘AA+’ are considered very low risk and with a high degree of safety for timely servicing of financial obligations.
"The revision in ratings assigned to debt instruments and bank facilities of IL&FS Financial Services due to significant deterioration in the liquidity profile of the company on impending debt servicing obligations in the near future and delay in funding support from the parent group on account of delay in fund raising plans. The rating revision also factors impairment of financial flexibility of the company as IFIN would not be able to access the commercial paper (CP) market for six-month period in line with compliance with the Reserve Bank Commercial Paper Directions, 2017,” the ratings agency says in a statement.
According to CARE Ratings, IFIN has been witnessing asset quality pressures for the last couple of years in sync with the stressed environment prevailing in the economy, especially in the infrastructure sector.
During FY17-18, IFIN’s asset quality parameters saw deterioration on account of slippages in certain accounts as well as shift of non-performing asset (NPAs) recognition from 120 days past due (dpd) to 90 dpd norm. As on 31 March 2018, IFIN reported a gross NPA ratio (calculated on credit exposures) of 5.30% as against 3.30% and net NPA ratio of 3.49% compared with 2.36% a year earlier.
The company’s net NPA to net worth ratio stood at 27.50% as on March 2018 compared with 14.84% same period last year. In addition to provisioning for NPAs, IFIN has been conservatively creating contingency provisions, which stood at Rs275 crore as on 31 March 2018 compared with Rs450 crore previous year, which covers about 52% of net NPAs, providing some comfort.
According to the ratings agency, there is deterioration in the financial risk profile of IFIN’s parent, Infrastructure Leasing and Financial Services Ltd (IL&FS) as well. It says, “The overall financial risk profile of the parent company-IL&FS has seen weakening on account of group’s elevated leverage levels and moderation in credit profile of key business verticals like energy vertical (housed in IL&FS Energy Development Co Ltd-IEDCL) and engineering vertical (housed in IL&FS Engineering and Construction Co Ltd-IECCL).”
CARE Ratings had earlier downgraded the ratings of IEDCL to ‘CARE BB-; Credit watch with negative implications’ and IECCL to ‘CARE BB; Negative’.
Earlier, the ratings agency had revised its ratings on long term debt instruments and bank facilities of IFIN due to moderation in the financial risk profile of the company on account of continued deterioration in asset quality parameters with rise in slippages, weakening of profitability on account of higher provisioning and increase in leverage on account of significant increase in borrowing levels and continued increase in exposure to IL&FS group entities.
The rating revision also factors in moderation in the credit profile of the parent company IL&FS and the group’s elevated leverage levels, CARE Ratings say.
CARE Ratings says its ratings downgrade also take into account that IFIN needs to comply with the regulatory requirement with respect to capital adequacy and group exposure norms by 31 March 2019, as prescribed by the Reserve Bank of India (RBI) in its inspection reports. “Considering the significant amount of exposure towards group entities vis-à-vis the company’s net owned funds (NOF), CARE believes that IFIN would require either significant capital infusion or off-loading exposure to its group entities to comply with the requirement within the time line,” it added.
The ratings continue to remain on ‘credit watch with negative implications’ on account of the IL&FS group’s pursuit of a strategic plan to de-leverage balance sheet by way of equity infusion, reduction of debt by refinancing the exposures in group companies and monetisation of certain identified (core as well as non-core) assets by end of FY18-19.
“Given the heightened leverage levels and the immediate need to support the group entities,” CARE Ratings say, “Infusion of funds by means of equity capital and credit lines in a time bound manner would be critical; any delay would further exacerbate the company’s financial profile.”
Meanwhile, the National Stock Exchange and the Bombay Stock Exchange had asked IL&FS Engineering and Construction, and IL&FS Transportation Networks to clarify on the ratings downgrade.
Both companies, however, informed the bourses that the news pertains to IL&FS Ltd, their promoter and not to the companies; hence they are unable to comment on it.