FREE

Event update: Financials - IL&FS – Assessing risks for lenders

Our view on IL&FS liquidity issues: We believe that the gap between what IL&FS can raise as funds (Rs72bn, exhibit 2) and what it requires by end-March 2019 (Rs337bn, exhibit 1) is big and indicates that liquidity issues will persist for the group, which is negative for lenders. Asset monetisation and receipt of claims from relevant authorities can ease IL&FS’s liquidity burden in a big way but this may take a long time to realise.

Key events and background:

• IL&FS defaulted on CPs and ICDs again. The first default was in end August followed by defaults on September 4 and then September 15. The company also held its board meeting last Saturday to discuss fund raising plans.
• IL&FS Limited was incorporated in 1987 with the objective of promoting infrastructure projects in the country. Central Bank, HDFC and UTI were the initial shareholders. Now the key shareholders include – LIC (25.3%), Orix Corporation Japan (23.5%), Abu Dhabi Investment Authority (12.56%), HDFC, (9.02%) CBI (7.67%) and SBI (6.42%)
• IL&FS has consolidated debt of Rs911bn.
• IL&FS is the ultimate holding company and has 24 direct and 135 indirect subsidiaries/ JVs.
• It also has overseas operations. According to an ICRA report, IL&FS is exposed to currency risks through its stakes in Elsamex SA, a Spanish company focusing on operations and maintenance of infrastructure assets, and ITNL’s investment in China — Chongqing YuHe Expressway Company operating a toll road there.
• Of the total debt of Rs911b, total loans of banks and FIs are Rs575bn.
• Lender-wise details of the consolidated debt are in exhibits 3 and 4. We have breakdown of 90% of consolidated bank/FI loans.
• Rating agencies have downgraded the parent and many subsidiaries following defaults in end August.

How much of liquidity does IL&FS consolidated need? We did a simple calculation of the amount of liquidity IL&FS needs. The total short term borrowings plus current maturities of long term borrowings plus one year interest payment for IL&FS adds upto Rs337bn.  These figures relate to FY18 and we have taken them from the company’s annual report. So the company needs Rs337bn of funds by March 2019. The operating cash flow is negative. Given the gap between what the company can raise as funds and what it needs, we believe the liquidity issue will likely persist at IL&FS which is negative for lenders. 

Fund raising plans: The company has the following fund raising plans:

Equity:  The parent IL&FS plans to raise Rs45bn through a rights issue. We believe this will sail through but will take a month for the process to be completed

• In the board meeting on 15^th Sept, the chairman Hemant Bhargava stepped down to avoid conflict of interest. He is from LIC and LIC is a stakeholder in IL&FS. His stepping down will facilitate the rights issue and a fresh loan by LIC to IL&FS.
• The company will also have to amend its Articles of Association to remove constraints on the shareholding percentage. According to the current AoA, if any shareholder’s stake crosses 25%, the acquiring shareholder will have to purchase the additional shares at a price not lower than the fair value. This approval will be sought at the AGM.

Debt: It also plans to raise Rs30bn through loans from LIC and SBI but we believe SBI has not shown an inclination to lend. So as of now, they can raise Rs12bn from LIC. To raise debt, authorised debt limits have to be raised which will happen at the board meet.

Sale of assets: The company plans to sell road assets and non-core assets including its corporate headquarters. The company plans to raise Rs300bn through such sales. We believe this will be a slow moving process going by experience of asset sales of other borrowers. According to a report in LiveMint one of the principal shareholders of IL&FS has asked the management to table a comprehensive turnaround and deleveraging plan, before talks of .  Accordingly, the management is working on a monetization plan to raise up to Rs. 50bn  through the sale of assets held by various group subsidiaries. The plan is expected to be submitted to the board for approval by the end of September

Claims from NHAI and others: The company says that it has Rs160bn stuck in claims with various authorities. The progress on receipt of claims is slow despite NITI Aayog’s 2016 circular mandating that government agencies must pay 75 per cent of the arbitral award amount to the developers. Also for getting these claims, a bank guarantee has to be furnished and we are not sure if banks will take give fresh non-fund exposures to IL&FS

In brief, IL&FS has talked about raising funds of Rs535bn but we believe what is immediately achievable is Rs72bn (Rs45bn through rights, Rs12bn through debt from LIC and sale of headquarters for Rs15bn).