Liq­uid­ity cri­sis to drag

Money Times - - News -

‘No respite for bulls’ screamed the head­lines of the dailies last week. The stock mar­ket is yet to re­cover fully from the cri­sis wit­nessed on Fri­day, 21 Septem­ber 2018, which en­gulfed all NBFCs and De­wan Hous­ing Fi­nance Cor­po­ra­tion Ltd (DHFL) and In­di­a­b­ulls Hous­ing Fi­nance Ltd (IBHFL) in par­tic­u­lar. The mar­ket has not yet re­cov­ered from the sharp fall of 1,150 points on the Sen­sex wit­nessed that day. As the In­fra­struc­ture Leas­ing & Fi­nan­cial Ser­vices (IL&FS) de­fault story con­tin­ued, a re­newed liq­uid­ity cri­sis was wit­nessed on Mon­day, 24 Septem­ber 2018, and the free fall­ing knife in­jured sev­eral non-fi­nance coun­ters like Eicher Mo­tors (-7%), Mahin­dra & Mahin­dra (-6.45%) also. The ‘de­clines’ out­num­bered the ‘ad­vances’ and some mid-caps and small-caps even made new 52-week lows de­stroy­ing the lit­tle con­fi­dence that was brew­ing from the pre­vi­ous ses­sion’s fall.

It is, there­fore, per­ti­nent for read­ers to un­der­stand the mas­sive cri­sis that has sur­faced in In­dian fi­nan­cial mar­kets. A tight bear hug en­gulfed the mar­kets in which ~Rs.6.5 lakh crore ($116.3 bil­lion) of in­vestor wealth was wiped off in the last ten trad­ing ses­sions. All this was due to the IL&FS cri­sis. IL&FS is an over 30 year old in­fra­struc­ture lend­ing gi­ant that helped de­velop and fi­nance projects worth $25 bil­lion in Asia’s fastest-grow­ing econ­omy. The com­pany of late has de­faulted on a few pay­ments, which means it has its liq­uid­ity has dried up. This spells trou­ble not only for it­self but also for its in­vestors, which in­clude banks, in­sur­ance com­pa­nies and mu­tual funds. Some an­a­lysts com­pare this cri­sis to the 2008 Lehman Brothers cri­sis in USA that trig­gered a global fi­nan­cial melt­down. In­vestors and traders are wor­ried about the cas­cad­ing ef­fects of IL&FS’ de­faults. Its im­pact can be gauged from the Sen­sex, which has al­ready lost 2,000 points in Septem­ber 2018 so far. Be­fore we jump to any con­clu­sion, let’s learn a lit­tle more about IL&FS. Apart from en­vi­sion­ing and build­ing in­fra­struc­ture projects, IL&FS is also a ‘shadow bank.’ The term is used to re­fer to the non-bank fi­nan­cial in­ter­me­di­aries that pro­vide ser­vices sim­i­lar to tra­di­tional com­mer­cial banks. Since these are not de­posit-tak­ing com­pa­nies, they are not as strin­gently reg­u­lated.

IL&FS sits atop a web of 169 sub­sidiaries, as­so­ci­ates and joint ven­ture com­pa­nies that makes the de­fault even more wor­ri­some. State-owned Life In­sur­ance Cor­po­ra­tion of In­dia (LIC) is its largest share­holder with 25.34% stake fol­lowed by Ja­pan’s Orix Cor­po­ra­tion (23.54%), Abu Dhabi In­vest­ment Au­thor­ity (12.56%), Hous­ing De­vel­op­ment Fi­nance Cor­po­ra­tion (9.02%), Cen­tral Bank of In­dia (7.67%), and State Bank of In­dia (6.42%).

In sim­ple words, IL&FS has run out of money and is, there­fore, un­able to ser­vice its re­pay­ment obli­ga­tions. Since 27 Au­gust 2018, it has de­faulted on around Rs.450 crore of in­ter-cor­po­rate de­posits (ICDs) to the Small In­dus­tries De­vel­op­ment Bank of In­dia (SIDBI). Ear­lier this month, IL&FS and its sub­sidiary, IL&FS Fi­nan­cial Ser­vices, also de­layed pay­ments on ICDs and com­mer­cial pa­pers, in­stru­ments that ma­ture in less than a year.

As per the lat­est up­date, IL&FS has a to­tal con­sol­i­dated debt of Rs.90000 crore. The re­cent slow­down in in­fra­struc­ture projects has only wors­ened the sit­u­a­tion. Ad­di­tion­ally, IL&FS Fi­nan­cial Ser­vices has about $500 mil­lion in re­pay­ments that are due in the se­cond half of this fis­cal while it has only about $27 mil­lion avail­able. Rat­ing agen­cies ICRA and CARE have down­graded the par­ent and its sub­sidiaries sig­nif­i­cantly from in­vest­ment grade to junk ear­lier this month. Such a down­grade pushes the prices of bonds lower, which af­fects debt funds. What makes the sit­u­a­tion worse is that most of the as­sets of IL&FS and its sub­sidiaries in­clude fi­nan­cial claims on in­fra­struc­ture projects such as roads, tun­nels, wa­ter treat­ment plants, power sta­tions, etc. which can­not be liq­ui­dated to es­cape the mess. IL&FS’ de­fault will have a sig­nif­i­cant mul­ti­plier domino im­pact on In­dia’s credit mar­kets. Ac­cord­ing to Moody’s In­vestor Ser­vices, the firm’s out­stand­ing deben­tures and com­mer­cial pa­pers as at 31 March 2018 ac­counted for 1% and 2% of In­dia’s do­mes­tic cor­po­rate debt mar­ket re­spec­tively.

On the other hand, its bor­row­ings from banks i.e. around Rs.57000 crore ac­counted for about 0.5% and 0.7% of the to­tal bank­ing loans! De­faults will, there­fore, spell more trou­ble for In­dian lenders, who are al­ready bat­tling a huge toxic loan pile.

To ex­tin­guish the de­fault fire, IL&FS plans to put its cor­po­rate head­quar­ter (worth ~Rs.1300 crore) on the block. It has also iden­ti­fied around 25 projects for sale. By sell­ing these as­sets, it may re­duce its debt by around Rs.30000 crore, which is just one-third of the to­tal and this process may take a year to re­al­ize.

The RBI, SEBI, Gov­ern­ment of In­dia (GoI) and LIC will come to IL&FS’ res­cue to sal­vage the en­tire fi­nance sec­tor and re­lieve it from the domino im­pact. The res­cue plan and its de­gree of suc­cess, if at all, will un­fold in the near fu­ture. “Once bit­ten twice shy” is the old adage but in­vestors are ex­pe­ri­enc­ing the se­cond bite this time. “Twice bit­ten al­ways shy or never shy,” only time will tell. Till then, an­a­lysts may ad­vise buy­ing select NBFC stocks that have fallen sharply. It may not be pru­dent to flow against the cur­rent. You’d rather be at the banks of the high tide and keep an eye on the devel­op­ments that are tak­ing place. The af­ter-ef­fects of this domino im­pact may take some more time to ease out or cool off. Till then, let this be a glar­ing ex­am­ple of the mar­ket’s ir­ra­tional­ity and a great les­son for us.

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