IL&FS crisis: India Ratings acted over 2 years after cautioning on ITNL

Rating agency India Ratings last week downgraded IL&FS Transportation Networks (ITNL) to default. But it was as early as June 2016 that the agency may have anticipated stress and could have seen a case for a future downgrade of the company. But it did not act until February this year. 

In its rating note on ITNL dated June 6, 2016, India Ratings affirmed its ‘A’ rating to ITNL. However, it changed its outlook from stable to negative on the company. On its note on ITNL, India Ratings said, “The ratings could be downgraded if the visibility of leverage reducing in a phased manner to below 4.5 times recedes.” 

Between June 2016 and February 2018, the rating agency did not put out any report either re-affirming or changing its outlook or rating on ITNL. 

“A negative outlook essentially means there could be a downgrade, possibility in a matter of 12 to 18 months, and needs to be reviewed in a year’s time,” said an industry official, who did not wish to be identified. However, India Ratings next action came only after 20 months since the June 2016 report. It did not comment on a query sent on Monday. In February 2018, the rating agency placed ITNL on rating watch negative from the earlier negative outlook. In its February note, India Ratings said, “The rating watch negative (RWN) reflects uncertainty regarding ITNL’s deleveraging plans.”

However, if details shared in both the June 2016 and February 2018 reviews were to go by, India Ratings had enough parameters to look into, including ITNL’s leverage ratio. 

In its February 8, 2018 note, India Ratings said, ITNL’s leverage ratio in financial year 2016-17 improved 7.35 times. The agency, in its note, also added that though the leverage improved, it was higher than what the agency expected (which was at 6 times) for FY 17. It is not clear as to why India Ratings did not act on a higher-than-expected leverage ratio earlier, and reported the same almost a year after FY17 ended. 

The June 2016 note further added that it expects visibility on leverage reduction to recede in the event of inability to monetise assets. All these concerns listed in 2016 still plagues ITNL and its present credit profile. In its February 2018 note, India Ratings said it is drawing comfort from the existing progress on some of the plans to reduce leverage. 

“For instance, ITNL received an arbitration award for a claim to the tune of Rs 5.47 billion in November 2017, which is likely to be received over the next couple of quarters. ITNL completed refinancing the debt of three of its special purpose vehicles to the tune of Rs 33.28 billion. ITNL also has proposed issuance of masala bonds to the tune of Rs 20 billion and dollar bonds of up to $300 million during 4QFY18, which will be used to replace short-term debt with longer maturities and reduce interest cost,” the note said.

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