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"My crisis is better than yours" – Or why Evergrande is no IL&FS

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Evergrande, the beleaguered Chinese property behemoth with a debt of over US$300 billion that presently threatens the stability of financial markets in China and elsewhere in its looming collapse is no IL&FS.

"My crisis is better than yours" – Or why Evergrande is no IL&FS
Infrastructure Leasing & Financial Services Limited (IL&FS) collapsed in September 2018, and a new government-nominated board was appointed on October 1, 2018.
As the board completes three years next week, engaging with what is an undoubtedly complex resolution mandate, the chairman of the IL&FS board has recently tweeted “Evergrande seems like China’s Lehman moment. Reminds us of IL&FS. Indian Government acted swiftly. Provided calm to financial markets. The government-appointed board estimates 61 percent recovery at IL&FS. Evergrande bonds in China trading ~ 25 cents to a $.”
The tweet comes even as the chairman’s term is extended by another six months, for undertaking what is undoubtedly a difficult, underappreciated, and thankless task.
It is however worth parsing the tweet for the multiple implications it contains.
Evergrande, the beleaguered Chinese property behemoth with a debt of over US$300 billion that presently threatens the stability of financial markets in China and elsewhere in its looming collapse is no IL&FS. The following explains why:
IL&FS was a public-private initiative promoted in 1987 by, among others, the public sector Central Bank of India (CBI) and Unit Trust of India (UTI). A product of India’s first wave of liberalisation of the 1990s, its mandate was to catalyse infrastructure development in the country and lead investments into the sector at a time when there was no format or prototype for private participation.
It pioneered and evangelised the Public-Private-Partnership (PPP) model, a model which is still widely used for private participation in public infrastructure projects. At its collapse, nearly 40 percent of its equity capital was owned by 3 public sector institutions Life Insurance Corporation (LIC) –25.34 percent, CBI –7.67 percent, and State Bank of India (SBI) –6.42 percent.
Evergrande by contrast, is a predominant real estate group engaged in property development that was promoted by Ka Yan Hui, now a Chinese billionaire, in 1996 and who owns 70.7 percent of its equity capital as on date.
Both were/are borne of excessive borrowing by a company/group and reckless lending by banks and financial markets in an asset expansionary cycle. However, in the case of IL&FS, it was the result of an unchecked growth in a predominantly infrastructure project portfolio (large parts of which subsequently stalled in implementation due to multiple reasons) while in the case of Evergrande, it was by most accounts, an unsustainable property asset price bubble.
Evergrande is entirely a market failure, and its market resolution — while it may or may not yet require Chinese government intervention given its scale — is reflected in the liquidity of its debt, which is still trading for a price in markets. What the final recovery for its debt will be, if it defaults and is liquidated – by government or market mechanisms — only time will tell.
IL&FS by comparison was not entirely a market failure. A creation of a quasi-socialist past, markets and banks were mistaken in their widespread belief of an implicit sovereign guarantee backing to its actions. A perception aided by the large presence of public sector shareholders, their board representation and a past track record of close co-operation and assistance from public authorities.
The IL&FS default resulted in the freezing of already shallow domestic debt markets even as it sent shockwaves into the financial system in a domino effect. It also brought lending to the crucial Non-Banking Finance Companies (NBFC) sector to a halt and its spill-on effects into the economy.
The IL&FS board’s own estimate of 61 percent recovery of its outstanding debt raises interesting questions. Is this 61 percent of total dues to lenders as of date in 2021? Or is it 61 percent of outstanding dues as in 2018 on the cut-off date? Without context, it hangs mid-air, and along with the non factoring of the time value of money of now 3 years and counting, makes any comparison one of between apples and oranges. That no details have been shared of how much of this recovery has been paid out to its creditors makes this comparison even more specious.
This undoubtedly good claimed recovery rate estimate (even if without evaluatory context) in the distress/liquidation sale situation of IL&FS assets post its 2018 collapse, would also appear to confirm claims that the IL&FS group was not only solvent but viable at the time when the highly liquid Piramal group (seeking investment opportunities in the sector) made an offer to merge in 2015, valuing it at Rs.750 per equity share.
An offer that was rejected by the public sector LIC (its largest shareholder), after much time and delay, reportedly asked for a price of between Rs 1,150 to 1,200 per IL&FS share.
For an IL&FS share that subsequently and rapidly went to a price of zero for its shareholders in 2018, a short less than 3 years later.
The role of the public sector LIC as the veto shareholder of that 2015 transaction, and that of the regulator Reserve Bank of India (in its inability to spot the growing crisis at the systemically important NBFC), and the passive inaction of both even as the IL&FS crisis grew without being addressed — is left to be examined by future chroniclers, who may be able to access information that is presently not in the public domain.
But it may be reasonable to conclude that while both may be crises primarily borne of excess leverage by feckless borrowers and reckless lenders, Evergrande is no IL&FS, with critical differences in their origins, trajectories, responsibilities, and even resolutions.
And that the only objective evaluation criteria of the success or failure of any resolution mechanism can be money repaid into the hands of creditors.
Of which no details in the case of IL&FS have yet been shared, even 3 years later to its collapse and the constitution of a government nominated board for its resolution.
The only truth, as markets say, is recovered monies in hand. The rest is just an empty spin.
—Sandeep Hasurkar is an ex-investment banker, and author of Never Too Big to Fail: The Collapse of IL&FS and its trillion rupee maze. The views expressed in the article are his own
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