Image courtesy: IL&FS Annual Report

The Rise And Stumble Of IL&FS

Among the pantheon of Indian infrastructure development and finance institutions is Infrastructure Leasing & Financial Services Ltd.

IL&FS is neither the oldest nor the youngest of the Indian infrastructure finance firms. IFCI, IDBI and ICICI all pre-date it and IDFC followed after it. But IL&FS’ uniqueness lay in the breadth of its operations. From “concept to execution”, IL&FS boasts of providing any and all services linked to infrastructure projects in India.

It’s that breadth and complexity of operations that may have come back to bite IL&FS — which was stripped off its AAA rating by at least one rating agency this week.

On Tuesday, ICRA downgraded the long-term rating on Rs 4,475 crore worth of debt securities from AAA to AA+. “The rating revision takes into account the company’s elevated debt levels owing to the funding commitments towards Group ventures,” ICRA said in its statement.

While the IL&FS group has been trying to monetise a number of businesses and projects under its umbrella, progress has been slow, leading to an increase in leverage, said the rating agency.

The standalone ‘gearing’ (or long-term debt to equity ratio) has risen to 3.08 times as of March 2018, compared to 2.60 times in March 2017, ICRA said.

An email sent to IL&FS on Monday seeking clarity on the group’s plans went unanswered.

A Private Complex Web

Since IL&FS operates as a RBI-registered ‘Core Investment Company’, its own operations are limited to investments in other group companies. As such, the health of its subsidiaries has a direct bearing on the CIC’s own finances.

A glance at IL&FS’ 2017 annual report shows that the company has 23 direct subsidiaries, 141 indirect subsidiaries (which include special purpose vehicles for individual projects), 6 joint ventures and 4 associate companies.

According to a CARE Ratings note dated May 9, 2018, the top five exposures of IL&FS accounted for about 67 percent of its lending and investment book. These included:

  • IL&FS Energy Development Company Ltd.,
  • IL&FS Transportation Networks Ltd. (ITNL),
  • IL&FS Engineering and Construction Company Ltd. (IECCL),
  • IL&FS Maritime Infrastructure Company Ltd. (IMIC)
  • IL&FS Financial Services Ltd. (IFIN)

The company has essentially followed a ‘conceive, develop and sell’ model over the years, said a rating agency official who spoke on the condition of anonymity. The problem has emerged because in the last few years, IL&FS has taken longer than expected to monetise some of its projects, said this person.

He added that just like other infrastructure companies, IL&FS too expanded its portfolio rapidly during the infrastructure boom years and is now facing trouble with some of its projects, particularly in the roads sector.

ITNL - The Immediate Source Of Trouble

The immediate concern for the group is emerging from IL&FS Transportation Networks—a subsidiary that was established in 2000. IL&FS holds 73 percent stake in the company.

According to a presentation on the company’s website, ITNL has 33 build-operate-transfer projects and five projects under the engineering, procurement and construction model. The execution of a large part of these projects was funded by debt, leading to an increase in the debt-equity ratio of ITNL. The company has also had trouble in monetising some of its completed projects and has faced delays in settlement of claims.

Between June and July, four of ITNL’s project special-purpose vehicles reported irregularities in debt servicing, showed an ICRA ratings note issued in July. A fifth project had to dip into its debt service reserve to pay good on dues. For some of the outstanding ITNL debt instruments, IL&FS has guaranteed any shortfall in payments. This means that the parent company could continue to face pressure due to financial pressures faced by the subsidiary.

In July, rating agencies downgraded the ratings for debt instruments of ITNL as well, citing some of these concerns.

ITNL’s gross leverage (debt/EBITDA) remains high at 6.9 times and its interest coverage remains weak at 1.2 times, said India Ratings in a note on July 25 while downgrading the company’s rating to BB from A. India Ratings also questioned whether support from the parent would be forthcoming, given the stress being faced by IL&FS itself.

IL&FS’ ability to support ITNL’s operations has reduced significantly, given the increase in overall debt levels of the IL&FS group. Hence, the agency has removed the notching support for ITNL from IL&FS.
India Ratings Statement (July 25, 2018)

The Twin Rights-Issue

The ability of ITNL and the IL&FS group to overcome the hump they are facing depends on the success of two rights issues.

ITNL is looking to raise Rs 4,500 crore through a rights issue. The parent IL&FS would need to contribute about Rs 3,300 crore of this if it intends to maintain its shareholding of 73 percent. To be able to put this money into ITNL, IL&FS is planning a rights issue of its own to raise Rs 3,000 crore.

ICRA, in its rating note on Monday, said there is no reason to believe that IL&FS’ largest shareholders will not step in with the required support.

ICRA expects support from shareholders to remain forthcoming given their demonstrated history of equity support in the past, with rights issuance to LIC, ORIX and ADIA in the rights issuance in FY 2015 and preference share issuance in FY2016.
ICRA Rating Note (August 7, 2018)

As on March 31, 2018, LIC held 25.34 percent in IL&FS, while ORIX Corporation Japan held 23.54 percent. Other prominent shareholders include Abu Dhabi Investment Authority (12.56 percent), HDFC (9.02 percent), Central Bank (7.67 percent) and SBI (6.42 percent).

A Management Shuffle?

The investors, however, may see this as an opportune time to review the operations of IL&FS.

Until now, the shareholders have been mostly passive investors and the organisation has been steered by former chairman Ravi Parthasarthy, said a senior financial sector consultant familiar with the firm’s operations. But in July, Parthasarthy stepped down citing health reasons and LIC’s Hemant Bhargava was appointed as non-executive chairman.

The shift led to rumbles that investors were concerned about the pressure building up across some of IL&FS’ subsidiaries and may be looking at a review of the operations. By putting its own person in-charge, LIC is flexing as its muscles as the organisation’s largest shareholder, this person said.

Over time, the scale and complexity of operations has become tougher and tougher to manage and it may be time to take a re-look at the group, this person added.