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What Is Credit Rating? What IL&FS Rating Downgrades Mean For Its Investors?
Credit rating is an analysis done in respect of different financial instruments, companies and even countries at large. Various agencies for the purpose referred as credit rating agencies conduct an assessment of the financial position of the firm or better associated credit risk.
The measure or rating is given to the financial instrument after a comprehensive assessment is done in respect of financial risks, business risks, management team quality as well as ability to meet out debt or maturing obligation as and when they come due. It is a detailed summary based on the credit worthiness and financial history in respect of borrowing and lending activities.
What credit rating downgrades happened for the behemoth of the infrastructure sector IL&FS?
Over the past week, several rating downgrades have been made for IL&FS long-term loans as well as NCDs. On September 17, the long-term ratings of IL&FS have been brought down to D from the earlier BB rating assigned on September 8. Similarly, the company's short term rating has also witnessed a downgrade to D on September 17.
The rating downgrade is not just limited to the parent company but also company's other subsidiaries that include IL&FS Financial Services, IL&FS Tamil Nadu Power Company Limited, IL&FS Energy Development Company Limited, IL&FS Transportation Networks Ltd and IL&FS Education & Technology Services.
Why such downgrades?
The main reasons for the rating downgrades of Infrastructure Leasing & Financial Services (IL&FS) are the series of defaults as well as the worsening of the company's ability to service debt. Plus there looms a threat of declining funding support from financial institutions.
Defaults by the leading infrastructure entity
In June 2018, the entity for the first time defaulted on inter-corporate deposits and commercial papers (borrowings) worth Rs 450 crore
Then lately on September 4, the company defaulted on a short term loan by SIDBI worth Rs. 1000 crore. The company also defaulted on a Rs. 500 crore repayment which resulted in the sacking of Chief general manager at SIDBI.
For the investors in debt mutual funds with exposure to IL&FS
It has come to light that many debt mutual fund schemes have exposure to the company and so investors in these schemes will see an immediate negative impact on the scheme's NAV, though the quantum of impact will depend on the magnitude of exposure to the stock or percentage of the downgraded scrip in the scheme's portfolio. So, it hence can be a wake up call for investors if the exposure is high as you never can be sure as to when will the company see a turnaround in its financial strength.
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