Factbox: India's IL&FS: its recent troubles and why investors should care

IL&FS Engineering and Construction

25/09/2018 14:48

MUMBAI, Sept 25 (Reuters) - A credit crunch facing major
Indian infrastructure financing and building company,
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 Central Bank of India  CBI.NS , 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)  ILFT.NS ,
engineering and procurement company IL&FS Engineering and
Construction Co Ltd  ILFE.NS  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  SBI.NS  with 6.42 percent, Japan's Orix Corp  8591.T 
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.  urn:newsml:reuters.com:*:nD8N1VY00R
    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.
 urn:newsml:reuters.com:*:nL4N1UF2DB  urn:newsml:reuters.com:*:nL4N1V82Q2  urn:newsml:reuters.com:*:nL3N1VX4EV
    The board of IL&FS then rushed to approve a rights issue of
45 billion rupees 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 270 billion rupees of debt rated as junk
by CARE Ratings and a further six group companies had suffered
downgrades with a negative outlook on another 120 billion rupees
of borrowings.  urn:newsml:reuters.com:*:nL4N1WB1E3
    
    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.  urn:newsml:reuters.com:*:nD8N1VY00R
    On Friday, IL&FS said it was unable to service its
obligation towards a letter of credit to IDBI Bank Ltd.
 urn:newsml:reuters.com:*:nL3N1W74QC
    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 22.83 billion rupees 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.  urn:newsml:reuters.com:*:nL3N1W804R urn:newsml:reuters.com:*:nL4N1WA21K

($1 = 72.6950 Indian rupees)

 (Reporting by Promit Mukherjee, Suvashree Choudhury and Abhirup
Roy
Editing by Martin Howell and Jane Merriman)
 ((promit.mukherjee@thomsonreuters.com; +91-22-6180-7516;
Reuters Messaging:
promit.mukherjee.thomsonreuters.com@reuters.net))