In a fresh setback for
debt-ridden IL&FS, rating agency Crisil has downgraded the non-convertible debentures of a road project in Jharkhand.
Crisil has warned that this and other projects are likely to stop interest rate payments contrary to the company's previous stance.
To get a sense of how this would impact struggling IL&FS, CNBC-TV18 spoke to Sandeep Parekh, founder of Finsec Law Advisors, TN Arun Kumar, ED of CARE Ratings, Mahendra Jajoo, head - fixed income at Mirae Asset Global Investments and Lakshmi Iyer, CIO-debt at Kotak Mahindra AMC.
“In case of the SPVs (Special Purpose Vehicles) currently, there are about four-five SPVs within mutual funds in terms of holdings. The amount would be in the ballpark region of about Rs 2,000-2,500 crore. Banks - I am not too very sure but what I read is that the number could be in the band of Rs 15,000 crore. I don’t have the precise number but mutual funds the number would hover in this particular band. This is spread across 4-5 SPVs across various schemes in the mutual fund industry,” said Iyer.
“We have taken a rating action in Jharkhand too and whatever rating action we take, it has to be based on a particular document or a particular interaction and our view on the same. Sometimes, unexpectedly something stands out and sometimes the trustee gives the confirmation that the payments will be made and the bankers ultimately go as to act who doesn’t make the payment for whatever reasons,” said Kumar.
Speaking about the impact on structured finance market as a whole, Parekh said, “I think it will have an adverse impact because the entire concept is of – setting up SPV is to have bankruptcy remoteness that the impact of the shareholder or the parent company has no impact on the special purpose vehicle, that is why they are called SPVs because they are supposed to be completely independent of their parents. Not just bankruptcy remoteness but also the payments etc, the rating everything is supposed to be independent. So the only time you can unravel that – here the question is where the fraud is. If the fraud is not there, the SPV level I don’t think is permissible to raise it. However, having said that, we wouldn’t know till it is too late what the probabilities are.”
“I don’t know the exact legal proceedings but they would have a legal remedy. Whenever there is a legal wrong, there is a legal remedy. So they can either go to National Company Law Tribunal (NCLT) or if that doesn’t work out, they will file a writ in the High Court but certainly if they have an asset to which they are entitled, they should be able to fight it legally. That is a clear concept. Having said that, rating agencies would look at the real probabilities and not at the legal probabilities because legal processes do take time and many of these are very time bound and therefore the consequences can be quite sudden rather than the legal process, which takes months and years at times,” he said.
On valuing mutual funds, Iyer added, “At Kotak Mutual Fund, we don’t have any exposure to these SPVs but from what we are tracking from the rating rationales and the rating press releases, there are at least three-four of them, which were mentioned, two of them which have a AAA SO rating and one of them which is a Jharkhand had a AA SO rating which has already got downgraded to BB as we speak over the weekend. At this current juncture, as per the valuations, any which ways below investment grade, one will need to apply a prudent haircut because the third party valuing agencies do not give a valuation price for that bond so it will depend upon the respective fund houses to take a call how exactly they want to value it.”
“I would say one certainly hopes that the court do hold that the payment should be made because otherwise it will be a very serious disruption to the entire structured finance business. There is a problem specific to the SPVs related to IL&FS but I think there is a much broader issue because it will then become very challenging for the weaker companies and the high complexity infrastructure projects to get funding. Then there are so many other road projects. So there are multiple implications. I think it is a very complicated and a very disruptive issue. So we certainly hope that the court give order in favour of the lenders here,” Jajoo said.
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