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Lenders, shareholders may come to the rescue of debt-laden IL&FS

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Lenders and shareholders may consider rescuing Infrastructure Leasing & Financial Services (IL&FS) to avoid a contagion effect on the entire financial market in India. The saving grace may come with a caveat that the infrastructure lender will have to create a tangible plan to monetise its assets.

A rescue package will be discussed in the meeting IL&FS has with the Reserve Bank of India (RBI) and shareholders on September 28, a day ahead of the its board meet.  A banker, part of one of the large shareholders of IL&FS said: "We had plans to sell stake in it as part of our non-core asset sale. So, we will definitely not lend more, but will have to wait and watch what the RBI says on Friday."

The government along with the banking and markets regulator RBI and Securities and Exchange Board of India (SEBI) have assured intervention and “appropriate action, if necessary”.

HDFC (Housing Development and Finance Corporation), one of its largest shareholders with 9.02 percent stake in IL&FS, will not attend the meeting. Earlier, it had refused to extend loans to IL&FS.

The recent defaults by IL&FS on its interest payments to its bondholders have triggered concerns in the debt market about a cash crisis arising out of increase in non-performing assets (NPAs) in non-banking financial companies (NBFCs), especially Dewan Housing Finance Ltd (DHFL) and Indiabulls Housing Finance. This caused ripple effects in equity stock markets, which crashed to nearly 1,500 points on September 22.

The crash followed DSP mutual fund selling its bond holdings of DHFL, which caused fears among investors of further defaults after the IL&FS, where the first signs of trouble emerged in June.

Liquidity infusion

“The only way the situation can be salvaged is if LIC (Life Insurance Corporation of India) and other lenders come in with Rs 4,000 - 5,000 crore worth of liquidity infusion. This will give reassurance to the market that large institutions will come forward to bail them out,” a senior banker said.

“We will look at what assets could fetch money in the shortest time possible, else some lenders are threatening legal action (going to the insolvency courts). Although, we need to look what IL&FS has to offer and what kind of hair-cuts (losses) we will have to take,” another lender said.

Given the large shareholding by government-backed institutions — LIC with 25.34 percent stake, Central Bank of India (7.67 percent) and State Bank of India (SBI, 6.42 percent) — the government could facilitate the sale of its assets to avoid a financial crisis at IL&FS and its consequent impact on other financial institutions.

IL&FS had defaulted on inter-corporate deposits and commercial papers (borrowings) worth about Rs 450 crore. In September, it defaulted on two of its bond maturities. Over the past two to three months, at least three rating agencies downgraded its long-term ratings.

As a result, the infrastructure giant, which is credited for building the longest tunnel in the country (the Chennai-Nashri tunnel), no longer carries an investment grade rating. This has made it difficult for the company to raise money from the market from here on.

Also Read: Debt and defaults: What happened to IL&FS?

“If the investors in debt funds start panicking, there could be a further contagion effect. Some of the NBFCs have very high leverage, the debt-to-equity ratio of some NBFCs is 11 or 12 times. That is a cause of concern particularly if there is an ALM (asset liability management) mismatch,” according to one of the bankers quoted above.

An ALM mismatch happens when you have funded long-term assets with the help of short-term liabilities. This means your repayment is due much before you get the cash from the assets, the banker explained.

A senior analyst said, “Fundamentally, IL&FS is strong but they have temporary pain. They had plans to monetise assets and raise sizeable equity but now that getting delayed, they have some money stuck with the government as well. So, if they manage to get a good price for their assets, they can assure the investors who can bring in money at this moment.”

As per IL&FS, it is due to receive Rs 16,000 crore from concession-granting authorities, which, if cleared, would help solve its liquidity problems. However, the government maintains the dues are much lower.

As on March end 2018, IL&FS’s total outstanding debt was Rs 91,091.31 crore at the group level, with most of the operating assets with its subsidiaries. Around Rs 5,756 crore worth of debt is due for repayment in the next one year.

However, with the resignation of top officials in IL&FS and its subsidiaries, it remains to be seen if the regulators and government can rescue the debt-strapped firm and contain the epidemic of default that could spread to other financial institutions. Or whether they will let IL&FS find its own destiny through the market.