Road construction takes place near the IL&FS building, in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Serial Defaulter IL&FS in Spotlight as Bond Payment Due

(Bloomberg) -- Infrastructure Leasing & Financial Services Ltd., which sent a shock through Indian financial markets last year when it defaulted on debt, faces a much-awaited coupon payment due Friday on overseas bonds.

The so-called dim sum bonds, or offshore yuan-denominated bonds, are guaranteed by IL&FS Transportation Networks Ltd., a unit of IL&FS which has already defaulted on interest payments due on five rupee-denominated bonds, according to a Dec. 31 filing. The company must pay a 37.5 million yuan ($5.5 million) coupon on the 1 billion yuan outstanding note issued by a special purpose entity, according to Bloomberg-compiled data.

IL&FS spokesman Sharad Goel declined to comment.

India’s government seized control of the non-bank lender last year, and pledged to avoid more nonpayments in October. But IL&FS has continued to miss payments on onshore debt. The troubled firm is pursuing a sale of assets but there are doubts on how quickly any relief will come.

“The only way that IL&FS dim sum bondholders may get paid is if there is a coupon held in the reserve account,”said Mihir Chandra, head analyst at fixed income finance firm SC Lowy.

The prospectus for the Dim Sum bonds, which were sold in January 2018 and mature in 2021, stipulates that the issuer must keep a yuan-denominated debt service reserve account and ensure that the amount in that account isn’t less than the interest due on all notes outstanding on succeeding interest payment date.

China assets

The dim sum bonds, which were quoted at 47.4 points on Friday, are pricing an “optimistic outcome,” and a lot needs to go right for bondholders to break even at those levels, according to Chandra.

One of the key assets linked to the dim sum bond is a 49 percent stake in Chongqing Yuhe Expressway Co., which IL&FS Transportation Networks acquired through a subsidiary in 2011, according to the dim sum bond prospectus. But that stake isn’t held directly by the issuer and selling assets and moving money out of China may be challenging.

“The primary way for dim sum bondholders to recover value is through the sale of their stake in the Yuhe Expressway in China,” said Chandra. “But that’s easier said than done.”

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