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India: IL&FS Default and The Nature of the Shadow Banking System

Value investor- India mid & small caps

Bhaskar Chakraborty

Thematic (Sector/Industry)

India Financials / Thematic (Sector/Industry)

<ul>
<li>Corporate exposure to IL&amp;FS Group’s debt stands at Rs349bn. Certain mutual fund (MF) schemes and corporate treasuries have concentrated holding in IL&amp;FS paper given their AAA-rating till Aug-18.</li>
<li>These institutions are likely to offload IL&amp;FS paper (if possible) or papers from NBFCs and corporate entities that they perceive as higher risk in order to meet redemption pressures or raising liquidity. They are likely to liquidate their positions in such entities completely as they cannot justify selling selectively in some schemes only.</li>
<li>This could force unforeseen liquidity events as seen with DSP MF’s liquidation of a part of its holding in Dewan Housing Finance at a sharp discount on Friday (as reported in the media). This could set in motion a domino effect.</li>
<li>A quick and large equity infusion could steady IL&amp;FS. But HDFC's reluctance (per media reports) in putting in any money in the form of debt or equity into IL&amp;FS complicates the equity infusion in our view.</li>
<li>Credit rating agencies have not covered themselves in glory as they failed to see the sharp deterioration in IL&amp;FS Group cashflows and interest coverage and continued with AAA-rating for the group till last month.</li>
<li>If media reports are correct, it raises questions on DSP MF’s decision to offload <a href="https://www.smartkarma.com/entities/8142" target="_blank" data-smartkarma-citation="entities:8142:1">Dewan Housing Finance (DEWH IN)</a> paper at a steep discount. Why didn’t DSP sell a better-rated more liquid paper to meet redemption pressure? Why would it take such a big hit on Rs3bn paper sale and acknowledge that it has residual exposure of Rs8bn with Dewan Housing after Friday’s sale? Is this signifying a sharp tightening of debt markets?</li>
</ul>


Corporate exposure to IL&amp;FS Group’s debt stands at Rs349bn. Certain mutual fund (MF) schemes and corporate treasuries have concentrated holding in IL&amp;FS paper given their AAA-rating till Aug-18.
These institutions are likely to offload IL&amp;FS paper (if possible) or papers from NBFCs and corporate entities that they perceive as higher risk in order to meet redemption pressures or raising liquidity. They are likely to liquidate their positions in such entities completely as they cannot justify selling selectively in some schemes only.
This could force unforeseen liquidity events as seen with DSP MF’s liquidation of a part of its holding in Dewan Housing Finance at a sharp discount on Friday (as reported in the media). This could set in motion a domino effect.
A quick and large equity infusion could steady IL&amp;FS. But HDFC's reluctance (per media reports) in putting in any money in the form of debt or equity into IL&amp;FS complicates the equity infusion in our view.
Credit rating agencies have not covered themselves in glory as they failed to see the sharp deterioration in IL&amp;FS Group cashflows and interest coverage and continued with AAA-rating for the group till last month.
If media reports are correct, it raises questions on DSP MF’s decision to offload Dewan Housing Finance (DEWH IN) paper at a steep discount. Why didn’t DSP sell a better-rated more liquid paper to meet redemption pressure? Why would it take such a big hit on Rs3bn paper sale and acknowledge that it has residual exposure of Rs8bn with Dewan Housing after Friday’s sale? Is this signifying a sharp tightening of debt markets?


Why IL&FS Default Could Create a Domino Effect