IL&FS Contagion - Trustline Blog

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ILampFS Contagion - Trustline Blog

• When DSP Mutual Fund sold DHFL bonds on Wednesday
  at a yield of 11, it represented one of the
  steepest discount sales in recent memory and the
  impact was obvious. Fearing payment troubles at
  DHFL, the stock was hammered by over 50 on
  Friday and the shareholder wealth loss was over
  Rs.8000 crore. The total bond sale was just worth
  Rs.300 crore. Welcome to the world of ILFS
  contagion.

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ILampFS Contagion - Trustline Blog
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ILFS Contagion We just saw a brief display of
what it could entail When DSP Mutual Fund sold
DHFL bonds on Wednesday at a yield of 11, it
represented one of the steepest discount sales in
recent memory and the impact was obvious. Fearing
payment troubles at DHFL, the stock was hammered
by over 50 on Friday and the shareholder wealth
loss was over Rs.8000 crore. The total bond sale
was just worth Rs.300 crore. Welcome to the world
of ILFS contagion. What is ILFS
contagion? That ILFS is on the brink of a major
default is, by now, well known and adequately
documented. Consider the numbers. ILFS has
already defaulted on five of its obligations
since August. The real problems are with ILFS
Transportation, where the money is locked in
nearly 28 illiquid road assets. The company has
only managed to repay around 68 million of its
debt dues till date and has around 2 billion
coming up in October. The rating agencies have
already reduced the rating status of ILFS paper
to Junk indicating high risk of default. And the
debt is not small. ILFS almost operates like a
shadow bank with debt to the tune of 12 billion.
Unless some of the shareholders like LIC and
other PSU banks chip in with liquidity, there is
no way ILFS will be able to meet any of these
commitments. Remember, these are sticky assets
and cannot be offloaded at short notice, despite
the best of intentions. Back to the DSP MF story
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What DSP MF did last week was purely a
pre-emptive measure to hedge its risks in the
event of a string of rating downgrades. To begin
with, it indicates that more NBFCs with exposures
to ILFS may see rating downgrades if there is no
action taken on time. LIC has its own challenges
in the form of a huge shortfall in Jeevan Saral
that is coming up for maturity and that could
limit the leeway for LIC. The DSP deal was
significant because it indicated that mutual
funds are willing to pare their positions even at
a discount in NBFC paper. The 11 yield indicated
an 18 discount meaning an Rs.100 bond was sold
in the market at Rs.82. If more funds opt for
that route, then the contagion could truly
spread. How contagion spreads Those who believe
that ILFS at 12 billion is small, think again.
Contagion spreads fast. Say, ILFS defaults again
and a debt fund needs cash. G-Secs are in losses
due to higher yields. An easier way out will be
to sell other corporate bonds. The target will
obviously be financial companies, mid caps and
others where the vulnerability is of the highest
order. And when such paper is dumped in the
market at a steep discount, that is when losses
spread and the contagion is obvious. The
government needs to act really fast to prevent
such a situation! Know More... ILFS
Contagion Visit Web...Customized Financial
Services Investment Solutions Provider in India
- Trustline
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