Defaults From IL&FS SPVs Followed Downgradings From Rating Agencies and Markdowns From Mutual Funds

With rating agencies downgrading several Special Purpose Vehicles (SPVs) of Infrastructure Leasing & Financial Services (IL&FS), mutual funds have marked down the value of debt issued by the SPVs of the beleaguered group. Despite the availability of cash with functional SPVs of IL&FS, the non-payment of interests by them has been raising concerns among investors and creditors.

Rating agency CRISIL has downgraded the rating of ILFS subsidiary - Jharkhand Road Projects Implementation Company Limited’s (JRPICL) non-convertible debentures (NCD) from ‘BB (SO)’ to ‘D’ (default) over non-payment of interest and principal due on January 21. CRISIL also downgraded rating on NCDs of another subsidiary North Karnataka Expressway Ltd from CRISIL AA(SO) to BB(SO).

On January 21, Aditya Birla Sun Life Mutual Fund has marked down the value of investments in debt securities of JRPICL by about 20 per cent and HDFC Mutual Fund has written off 25 per cent of its exposure in another road project - Hazaribagh Ranchi Expressway Ltd of ILFS. It has been reported that other mutual funds including UTI are considering similar markdowns of debt issued by IL&FS SPVs, as the government appointed IL&FS board under Uday Kotak’s chairmanship decided to stay repayments of SPVs.

“There is heightened risk of default due to reversal in the IL&FS management’s earlier stance of maintaining the integrity of JRPICL’s ring-fenced structure and structured payment waterfall. This had spawned untested legal risks for bankruptcy-remote SPVs”, stated CRISIL.

On October 15 last year, the IL&FS group was granted a temporary moratorium by

the National Company Law Appellate Tribunal (NCLAT) on government’s appeal. The next hearing in this case is slated on January 28. While the group had first kept SPVs outside moratorium, it changed its stance earlier this month when two of its SPVs - JRPICL and West Gujarat Expressway Ltd (WGEL) have stopped debt repayment and sought refund of debt repaid after 15 October 2018.

According to data on the India Ratings and Research, JRPICL  has outstanding NCDs of Rs 1,730 crore and WGEL is with outstanding NCDs of Rs 141.26 crore. In a statement, India Ratings said that the group is wrongly interpreting the NCLAT order on Moratorium by including SPVs. “These (SPVs) continue to generate sufficient cash. If JRPICL and WGEL are able to stop the payments, then the ratings on the bonds will have to be downgraded to ‘IND D’ (default) in line with Securities and Exchange Board of India’s regulations which direct credit rating agencies to recognise defaults on the ‘one day one rupee’ principle. Importantly, such defaults by JRPICL and WGEL (and any other IL&FS SPV) will not only destabilise all their ratings but also raise question on the effectiveness of their ring-fenced structure,” stated India Ratings.

IL&FS group owns about 162 such SPVs across the country. The business model of the group was predicated on the creation of SPVs and to conduct business. The group’s new board is probing the financial transactions of SPVs as part of their resolution plan of the group.

IL&FS has accumulated debt of Rs 91,000 crore including more than Rs 50,000 from Banks. Currently, the new board has been implementing asset divestment of the group while probing agencies such as SEBI and SFIO are investigating the financial scam.