When IL&FS defaulted on its ICD with SIDBI for the second time on Friday, the alarm bells surely started ringing. In fact the warnings were already out when IL&FS first defaulted on its ICD to SIDBI a couple of weeks ago. That was the time most of the credit rating agencies rushed to downgrade IL&FS debt to Junk category. But that has only exacerbated matters as most of the bond holders are now sitting on huge losses on their books. But, what exactly is this IL&FS fiasco?
How IL&FS got here?
The problems at IL&FS first came to light when analysts started questioning the ability of IL&FS to service the $500 million of debt that was payable in the next few months. IL&FS only had liquidity of around $27 million leaving it with a huge shortfall of close to $473 million. That was the time the problem first came to light. The SIDBI default was the trigger that set of a series of downgrades. But IL&FS has financed assets against these loans, so what is the problem. That is exactly the problem. Most of IL&FS assets are locked up in road assets or toll assets which are illiquid and cannot be monetized easily. Also, finding ready buyers would come at a huge cost in the form of haircuts. With the recent downgrade, IL&FS is unlikely to get funding from any of the institutions. The question is whether we could see another implosion in India?
Why IL&FS really matters
The problem with IL&FS is that it is not any other company. It is deep in debt and most of the funds are deployed in deep infrastructure assets with limited short term visibility. IL&FS is not a deposit taking company but funds itself through institutional money. The ripple effect could be huge. It has issued bonds to the tune of $12.5 billion and its buyers include insurance companies, provident funds and domestic mutual funds. In addition, the LIC has a 25% stake in the company and that also makes the company systemically important. How the situation is remedied remains to be seen even as IL&FS has put its BKC headquarters on the block. But then, there are bigger questions that come up here.
Where were the gatekeepers?
The question is back to the basics; where were the gatekeepers in this case? The auditors were obviously caught napping with little to offer by way of explanation. What were the rating agencies doing since all the debt is rated by the agencies? Lastly, why did the lenders and bankers not flag off the issue to the RBI and why were no such points found in the routine scrutiny that is conducted of systemically important intermediaries? If this company is allowed to crumble, it could be India’s Lehman moment. India surely cannot afford such an eventuality! ©