A credit crunch facing Infrastructure Financing and Leasing Services Ltd (IL&FS) has roiled the nation’s financial markets in recent days, triggering concerns about risk in the rest of the country’s shadow banking sector.
Below is an outline of what the company does and the problems it faces.
What IS IL&FS?
IL&FS was floated by government-controlled entities, including the Reserve Bank of India (RBI), Unit Trust of India and the Housing Development Finance Corp in the 1980s.
Thanks to India’s massive infrastructure financing and development needs, the company grew from a small road building and operating firm to an infrastructure giant in three decades.
As Prime Minister Narendra Modi in 2014-15 announced a major programme to build highways, roads, tunnels, affordable housing and renewable power generation across the country, IL&FS’s ambitions grew and it was one of the biggest beneficiaries of the drive.
It has won several of these projects, either through direct bidding or joint ventures, but has taken on heavy debt as a result.
Its subsidiaries include transportation network building subsidiary IL&FS Transportation Networks Ltd (ITNL), engineering and procurement company IL&FS Engineering and Construction Co Ltd and financier IL&FS Financial Services Ltd.
Until early August, it had a AAA rating from credit rating agencies largely thanks to its place at the centre of government infrastructure plans and its robust list of top shareholders.
IL&FS’s major shareholders include state-backed Life Insurance Corp of India holding 25.3 percent stake, State Bank of India with 6.42 percent, Japan’s Orix Corp holding 23 percent and the Abu Dhabi Investment Authority with 12 percent, according to the company’s website up to the end of the financial year to March 2018.
This has helped IL&FS to secure funding from investors.
What Went Wrong?
In summary - the company piled up too much debt to be paid back in the short term while revenues from its assets are skewed towards the longer term.
IL&FS first shocked markets when it postponed a $350 million bonds issuance in March due to demand for a higher yield from investors.
Under increasing pressure from the Reserve Bank of India to identify and deal with bad loans quickly, the country’s banks were wary of extending and rolling over loans if the credit risks were high. This made it more difficult for IL&FS to refinance its debt as it came due.
IL&FS’ net debt to earnings before interest, tax, depreciation and amortisation, a measure of a company’s ability to pay debt through its operating income, was hovering around a ratio of 11 at the end of March 2018, based on data from the company’s latest annual report. Analysts consider anything above 5 a red flag.
Then came a string of rating downgrades, beginning in June.
The board of IL&FS then rushed to approve a rights issue of Rs 4,500 crore to be completed by October. The board also sought to recapitalise IL&FS Financial Services, ITNL and three more smaller subsidiaries. The rights issue will close in October 2018.
The company said in its annual report that because many of company’s claims and other payments involved government contracts it might take two-three years to get these resolved.
By the middle of September, IL&FS and IL&FS Financial Services had a combined Rs 27,000 crore of debt rated as junk by CARE Ratings and a further six group companies had suffered downgrades with a negative outlook on another Rs 12,000 crore of borrowings.
What Are Its Major Projects
IL&FS is an anchor investor and co-developer of Gujarat International Finance Tec-City (GIFT), where it is building 7.77 million square feet (msf) of commercial and residential space.
Its ITNL subsidiary has the contract to build a 14.2-km tunnel to connect the northern city of Leh to Kashmir. The work on this is yet to start.
According to a February presentation to analysts, the group is also the largest company in India constructing roads on a build-operate-transfer basis, with 26 operational and seven projects under construction.
Its energy operation is developing up to 13,600 megawatts (MW) of capacity including 5000 MW from a solar park in a joint venture with the Rajasthan government.
Defaults Lead To Contagion Threat
IL&FS has revealed a series of delays and defaults on its debt obligations and inter-corporate deposits.
On Friday, IL&FS said it was unable to service its obligation towards a letter of credit to IDBI Bank Ltd.
This has raised concerns about the possibility of further defaults hitting mutual funds with exposure to IL&FS and its group companies.
Twelve asset management companies through 32 funds held an aggregate Rs 2,283 crore in debt securities of IL&FS and its subsidiaries at the end of August, according to analysts at Morningstar.Some of them have already marked down those investments as bond prices crashed, according to fund management sources. Investors are also worried about redemption pressure spilling over to other shadow bank lenders.