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Event update: Financials - IL&FS – Lack of clarity on fund infusion is negative

The IL&FS Board met on Sep-29 to solve the current liquidity crunch. The Board meet was preceded by the company’s AGM. While the Board outlined a 3 pronged strategy, as of now there is no clear visibility of the timeline of fund infusion (both debt and equity) nor is there visibility of a time frame for asset monetization. Also there are legal and other hurdles in monetizing assets which need to be resolved.  As an added negative, the Congress has started accusing the Central government of using public funds to bail out IL&FS. If they continue with this criticism, there is a likelihood of LIC and SBI not going ahead with their planned equity infusion into IL&FS.   As such, ILFS’ situation remains tough which is negative not only for the creditors of IL&FS but also for the debt market at large. The current mayhem in the private debt market was triggered by defaults and subsequent rating downgrades of IL&FS and its subsidiaries.  We had carried a lender wise breakdown of the consolidated debt of IL&FS where we had given the breakdown of 90% of the consolidated debt of banks and financial institutions. Meanwhile IL&FS group continued to default on payments on Saturday. There are some media reports that the government may supersede the Board of IL&FS. If these reports are true, it could mean high haircuts for lenders.

• The IL&FS Board outlined a 3 pronged strategy to solve the current liquidity crunch at IL&FS.

1. The first part will be to complete the rights issue and enable the company to re-capitalise itself. It plans to raise up to Rs45bn through a rights issue.
2. The second part will be to sell assets,
3. While the third part will be to get a credit line to support repayment of debtors till its assets sales begin. 

• The Board appointed global professional services firm Alvarez & Marsal to prepare a comprehensive restructuring plan for the group. The formulation of a restructuring plan with the help of an expert consultant is important for the group to demonstrate to shareholders and lenders that it was self-sufficient in repaying its liabilities, according to the MD of IL&FS. This statement implies that lenders are not comfortable in making a liquidity infusion before  they see a time bound plan. The statement was silent on the timeline by which the restructuring plan would be presented and its subsequent roll-out.
• MD believes rights issue will be through by Oct 30, but final nod from SBI/LIC awaited: It appears that the large Shareholders would take the final decision on capital infusion and liquidity, based on the new restructuring plan. The MD said that the shareholders approved a rights issue at the AGM which the company plans to complete by October 30. Of the large shareholders, LIC, and SBI are likely to participate in the rights while ADIA, Central Bank and HDFC are likely to stay away, based on media reports. Also Orix has not yet committed to the issue. It must be noted that the individual shareholders who are likely to pump in money in the rights offering have not given their final nod though they have indicated willingness. Also a key opposition party, Congress has started criticising the government for bailing out IL&FS with public funds. If the criticism continues there is a likelihood of the infusion being called off.
• We believe till equity is infused, lender-shareholders may not infuse debt into the company. So the first step will likely be an equity infusion followed by a debt infusion if shareholders are satisfied with the restructuring plan. IL&FS had earlier asked for a credit line of Rs30bn from SBI and LIC. At the AGM, shareholders have approved an increase in the company’s borrowing limit.
• In addition, the board has also given nod for recapitalising group companies to the extent of Rs 50 billion in IL&FS Financial Services, IL&FS Transportation, IL&FS Energy, IL&FS Environment, and IL&FS Education.

Asset monetization could generate rs160bn but will be long drawn: The company has selected 25 assets which they want to sell of which 19 are road projects. Of these assets there is buying interest in 14 assets. The company plans to raise Rs 160 billion from the sale of these14 operational road assets that are housed under its subsidiary ITNL which has many SPVs.