IL&FS board move to suspend debt payments affects quality of assets

  • IL&FS board’s decision to prevent a full-fledged bankruptcy and stabilize subsidiaries has NCLAT’s approval
  • Saving cash instead of servicing debt and maintaining assets has affected the quality of assets on sale

The Infrastructure Leasing and Financial Services Ltd (IL&FS) board’s decision to temporarily suspend debt repayments and conserve cash has triggered defaults and worsened the quality of its assets, three investment advisors said, adding this has led to prospective buyers offering far less than what IL&FS wants.

The decision of the Uday Kotak-led IL&FS board to prevent a full-fledged bankruptcy and stabilize its subsidiaries had the approval of the National Company Law Appellate Tribunal (NCLAT) as well.

Saving cash instead of servicing debt and maintaining assets has affected the quality of assets on sale, said one of the three people cited above, all of whom spoke under the condition of anonymity.

“The industry doesn’t expect the resolution to progress very much while the elections are on," the person added. “So, it will take at least till June for the new government to settle in and for investors to decide how comfortable they are making large infrastructure commitments. If IL&FS does not maintain the quality of assets until then, the valuation the company hopes to receive will keep falling. It might even become hard for them to repay the principal secured lenders in full, let alone others."

“The NCLAT diktat that cash generated by the asset-holding special purpose vehicles (SPVs) will remain with the SPV and will not be used to pay stakeholders or creditors implies credit downgrading will keep happening. For bidders, this leads to ambiguity in how one should price their bid," said Sandeep Upadhyay, managing director and chief executive officer, Centrum Infrastructure Advisory.

“There’s a vast difference in the cost of financing for an asset that’s rated AAA or AA and one that has fallen to below B or is already in default. For an under-construction asset, it’s difficult for bidders to assign a cost-to-complete on an asset that is half-finished. I believe bidders are treading cautiously with the IL&FS assets."

Bidders are also worried about disrepair and asset deterioration. One example is the Hazaribagh Ranchi Expressway Ltd project that the National Highways Authority of India (NHAI) had awarded to IL&FS Transportation Networks Ltd (ITNL) on a build-operate-transfer annuity basis and had begun operations in April 2015.

In a 4 January note, credit rating agency India Ratings and Research said there were “continued maintenance deficiencies" in the project.

“The roughness index of the project stretch (has fallen) below the required concession agreement stipulation of 2,500mm/km at various instances. The management aims to address all operations and maintenance (O&M) related deficiencies and a new roughness test will be conducted by end-January 2019... The maintenance-related issues have accentuated the risks of the project, which could lead to possible annuity deductions. Therefore, completion of the maintenance activity by end-January 2019 is a key rating sensitivity and failure to complete the same will lead to a multi-notch downgrade."

In an updated note on 15 April, India Ratings downgraded the project from C to D (default), citing maintenance deficiencies, and added that failure to address deficiencies could lead to National Highways Authority of India paying it less than the agreed annuity amount.

The National Highways Authority of India, which has made all previous 12 annuity payments on time, has not made the 13th payment scheduled for March yet, the note added.

A spokesperson for IL&FS declined to respond to emailed questions.