Rs 45 bn rights not enough, IL&FS needs Rs 300 bn in fresh equity: Report

The company will also have to take an impairment of at least Rs 150 billion before recovering a single rupee from its subsidiaries, says distressed-debt specialist firm REDD Intelligence

REDD Intelligence, a Singapore-based analytics specialist on distressed debt, says beleaguered infrastructure financier Infrastructure Leasing & Financial Services (IL&FS) will require equity infusion up to Rs 300 billion to get back on the rails.

It will also have to take an impairment of at least Rs 150 bn before recovering a single rupee from its subsidiaries, says REDD.

“The required equity infusion could be in the range of Rs 225-300 bn, much higher than the proposed Rs 45 bn rights issue,” it said in a report dated September 27. “We estimate the equity required to right-size the balance sheet is Rs 295 bn, equal to the standalone borrowings at IL&FS and ITNL (IL&FS Transportation Networks). Excessive holding company leverage was used to finance parent contributions in operating subsidiaries.”

REDD estimates IL&FS Financial Services (IFIN) and other financial subsidiaries of the group have Rs 250 bn in financial assets and Rs 30 bn in equity. IL&FS’ consolidated fixed assets, including concessions, are Rs 610 bn. Which, based on a leverage of two (debt to equity), requires an equity contribution of Rs 203 bn. IL&FS also has Rs 87 billion in equity investments, loans and advances, and receivables from associates — these should form part of equity and not be leveraged, advises REDD. All three would bring the total equity requirement to Rs 320 bn, it concludes.

IL&FS has a current shareholder fund of Rs 93 bn, leaving the required estimated equity infusion at Rs 227 bn. “We estimate high impairment of its assets — an example being the 1,200 Mw coal-fired power plant subsidiary that reported total assets of Rs 137 bn. This is very high, at Rs 115 million per Mw, compared to the industry benchmark of Rs 80-90 mn per Mw. Insolvency proceedings have also been against this subsidiary by its lenders. Adding the capital required for IFIN with respect to loans to group companies and impairment for assets, to the extent of Rs 227 bn calculated above, makes the Rs 300 bn in new capital a reasonable number,” it said.

CASH BOOK

• IFIN and other subsidiaries of the group have Rs 250 bn in assets and Rs 30 bn in equity

• IL&FS’ consolidated fixed assets are Rs 610 bn, which requires an equity contribution of Rs 203 bn

• IL&FS also has Rs 87 billion in equity investments, loans and advances, and receivables

• All three would bring the total equity requirement to Rs 320 bn

REDD estimates IL&FS will have to take high impairment for its assets on account of power and road projects. The energy company started facing difficulties after it set up the coal-based power plant and was able to secure a power purchase agreement for only 540 Mw. It has been referred for insolvency proceedings to the National Company Law Tribunal (NCLT). "Besides, we estimate the Rs 5.5 bn in exposure to associates like Hill Country Properties, Dighi Ports (currently in insolvency) and IL&FS Engineering (also filed before NCLT) to have limited recoveries and, therefore, require impairment. We estimate a Rs 12-14 bn write-off is required at its large subsidiary, Chenani-Nashari Tunnelway. We have ascribed a value of Rs 34-36 bn versus the project value of Rs 48 bn on the company’s books, by discounting the annuities from the project at (an annual) 12 per cent,” REDD said.

It has estimated a write-off might even be required for IL&FS’ Rs 18-bn exposure to subsidiary IL&FS Maritime Infrastructure, which has high related-party transactions and had reported a loss of Rs 3 bn. It said the related-party loans in most cases were subordinated into the capital structure and in the bankruptcy process.

Therefore, REDD has estimated that IL&FS has Rs 300 bn in loans at risk to its subsidiaries.

“Given the second-lien nature of the secured loans at the IL&FS parent and the ITNL parent, recovery could be constrained by the quality of the collateral, such as equity pledges from operating subsidiaries,” it added.