IL&FS Financial Services’ Rs4,800 Crore NCD Downgraded to ‘BB’ on Debt Concerns
CARE Ratings has downgraded its rating on Rs4,800 crore non-convertible debentures (NCD) of IL&FS Financial Services Ltd (IFIN) to 'BB' from 'AA+' while keeping the ratings on credit watch with negative implications. Instruments with ‘BB’ rating are considered to have moderate risk of default regarding timely servicing of financial obligations, while those with ‘AA+’ are considered very low risk and with a high degree of safety for timely servicing of financial obligations.
 
"The revision in ratings assigned to debt instruments and bank facilities of IL&FS Financial Services due to significant deterioration in the liquidity profile of the company on impending debt servicing obligations in the near future and delay in funding support from the parent group on account of delay in fund raising plans. The rating revision also factors impairment of financial flexibility of the company as IFIN would not be able to access the commercial paper (CP) market for six-month period in line with compliance with the Reserve Bank Commercial Paper Directions, 2017,” the ratings agency says in a statement.
 
 
According to CARE Ratings, IFIN has been witnessing asset quality pressures for the last couple of years in sync with the stressed environment prevailing in the economy, especially in the infrastructure sector. 
 
 
During FY17-18, IFIN’s asset quality parameters saw deterioration on account of slippages in certain accounts as well as shift of non-performing asset (NPAs) recognition from 120 days past due (dpd) to 90 dpd norm. As on 31 March 2018, IFIN reported a gross NPA ratio (calculated on credit exposures) of 5.30% as against 3.30% and net NPA ratio of 3.49% compared with 2.36% a year earlier. 
 
The company’s net NPA to net worth ratio stood at 27.50% as on March 2018 compared with 14.84% same period last year. In addition to provisioning for NPAs, IFIN has been conservatively creating contingency provisions, which stood at Rs275 crore as on 31 March 2018 compared with Rs450 crore previous year, which covers about 52% of net NPAs, providing some comfort.
 
According to the ratings agency, there is deterioration in the financial risk profile of IFIN’s parent, Infrastructure Leasing and Financial Services Ltd (IL&FS) as well. It says, “The overall financial risk profile of the parent company-IL&FS has seen weakening on account of group’s elevated leverage levels and moderation in credit profile of key business verticals like energy vertical (housed in IL&FS Energy Development Co Ltd-IEDCL) and engineering vertical (housed in IL&FS Engineering and Construction Co Ltd-IECCL).” 
 
CARE Ratings had earlier downgraded the ratings of IEDCL to ‘CARE BB-; Credit watch with negative implications’ and IECCL to ‘CARE BB; Negative’.
 
Earlier, the ratings agency had revised its ratings on long term debt instruments and bank facilities of IFIN due to moderation in the financial risk profile of the company on account of continued deterioration in asset quality parameters with rise in slippages, weakening of profitability on account of higher provisioning and increase in leverage on account of significant increase in borrowing levels and continued increase in exposure to IL&FS group entities. 
 
The rating revision also factors in moderation in the credit profile of the parent company IL&FS and the group’s elevated leverage levels, CARE Ratings say.
 
CARE Ratings says its ratings downgrade also take into account that IFIN needs to comply with the regulatory requirement with respect to capital adequacy and group exposure norms by 31 March 2019, as prescribed by the Reserve Bank of India (RBI) in its inspection reports. “Considering the significant amount of exposure towards group entities vis-à-vis the company’s net owned funds (NOF), CARE believes that IFIN would require either significant capital infusion or off-loading exposure to its group entities to comply with the requirement within the time line,” it added.
 
The ratings continue to remain on ‘credit watch with negative implications’ on account of the IL&FS group’s pursuit of a strategic plan to de-leverage balance sheet by way of equity infusion, reduction of debt by refinancing the exposures in group companies and monetisation of certain identified (core as well as non-core) assets by end of FY18-19. 
 
“Given the heightened leverage levels and the immediate need to support the group entities,” CARE Ratings say, “Infusion of funds by means of equity capital and credit lines in a time bound manner would be critical; any delay would further exacerbate the company’s financial profile.” 
 
Meanwhile, the National Stock Exchange and the Bombay Stock Exchange had asked IL&FS Engineering and Construction, and IL&FS Transportation Networks to clarify on the ratings downgrade.

Both companies, however, informed the bourses that the news pertains to IL&FS Ltd, their promoter and not to the companies; hence they are unable to comment on it.
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COMMENTS

jaideep shirali

2 months ago

Every chain is as strong as its weakest link, in this case the rating agencies have failed the investors again miserably, thus raising doubts about the responsibility that credit rating agencies have towards investors. A downgrade of nine rating notches in one day makes one wonder if they are, put mildly, sleeping on the job. The rating agencies must be fined and in fact made to pay the losses investors may occur due to panic selling. SEBI should also focus more on the debt markets, one reason for the lack of liquidity is the danger of default, such incidents without suitable deterrent, would drive investors back to bank FDs.

V Ramesh

2 months ago

As I said earlier, the downgrade happened after , everybody, including my grandmother, knew there was a problem. The rating agencies have the highest EBIDTA of any sector, and they have absolutely no accountability.

Debt-laden IL&FS Calls Emergency Board Meeting for Raising Funds
Infrastructure Leasing & Financial Services (IL&FS), the an unlisted infrastructure behemoth with scores of complex subsidiaries, some of which are listed and a giant load of debt, has called an emergency meeting of its board of directors for raising funds. The financial services conglomerate, with around Rs1-lakh-crore public debt, is gasping for liquidity after failing to meet certain repayment obligations and triggering fears of loan recalls, says a report from Times of India.
 
"The emergency meeting is expected to convey the intensifying crisis at IL&FS to all the main shareholders and also possibly expedite a proposed Rs4,500-crore rights issue, which is scheduled for early November. On the positive side, all prominent shareholders - Life Insurance Corp of India (LIC), Orix of Japan, State Bank of India (SBI), Abu Dhabi Investment Authority and HDFC - have agreed in principle to participate in the rights issue," the report says. 
 
Other report from Business Standard says the board will take a call on fundraising, sale of assets, including road projects, and default by its subsidiary IL&FS Financial Services (IFIN) on commercial paper. 
 
Last month, IL&FS Financial Services has failed to meet its repayment obligations through a commercial paper. Due to this, Reserve Bank of India (RBI) barred the group company from raisng short-term funds through commercial paper route till 2019.
 
Ratings agencies have downgraded the debt of IL&FS Transportation Networks Ltdd and two other entities in the road sector are struggling to make payments on time. There are also reports about delayed salaries in its toll company and ILFS Environmental Infrastructure and Services Ltd. Several fund raising plans have also failed. 
 
As reported by Moneylife, IL&FS has reportedly defaulted on a short-term loan worth hundreds of crores from Small Industries Development Bank of India (SIDBI). According to our sources, IL&FS has defaulted in repaying a short-term loan of Rs1,000 crore to SIDBI. At the same time, a subsidiary of IL&FS too has defaulted in repaying loan worth about Rs500 crore to the development financial institution.
 
Defaulting on short-term loan commitment that too from an infrastructure development and finance company with pan-India presence, is very serious issue. Nothing of this sort has happened before, our source says.
 
Separately, last week, ratings agency ICRA has downgraded to 'D' from 'C' bank debt of Rapid Metrorail Gurgaon South Ltd (RMGSL) for not making interest payment for August 2018 on time. RMGSL is a special purpose vehicle (SPV) sponsored by IL&FS Rail Ltd (IRL) with 65.0% stake and IL&FS Transportation Networks Ltd (ITNL) with balance stake.
 
"The revision of RMGSL's rating takes into account the recent irregularities in debt servicing by the company. RMGSL has not paid the interest for the month of August 2018. The company's inability to generate sufficient revenues due to continued weak ridership on the project route had made it highly dependent on timely funding support from promoters. However, the promoter has not made available the required funds. As per the RMGSL's management, the company has represented to Haryana Urban Development Authority (HUDA) for claims due to breach of provisions of the Concession Agreement," ICRA has said.
 
Total cost of the project was funded by a combination of debt of Rs1,500 crore and equity. The entire term loan of Rs1,500 crore has been sanctioned by a consortium of five banks with Canara Bank as the lead bank and an external commercial borrowing (ECB) loan lender. The project achieved commercial operations on 31 March 2017.  
 
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GIFT City-IL&FS Issue Gets Murkier with Ajay Pandey’s Interview
On 8th August, I wrote about an unprecedented case where the independent director and audit committee head of Gujarat International Finance Tec-City (GIFT City) had filed a public interest litigation (PIL) alleging that the showpiece Rs70,000-crore project had virtually been gifted away. The beneficiary was its private sector partner, Infrastructure Leasing & Financial Services (IL&FS), at a huge cost to the government and the people of Gujarat. (Read: Is GIFT City Gujarat’s Gift to IL&FS through One-sided Deals?)
 
What made this particularly newsworthy is the fact that IL&FS is cash strapped and a series of its projects are in deep trouble. It has outstanding loans of over Rs1.2 lakh crore (source: Moneycontrol) and has been directed by the Reserve Bank of India (RBI) to reduce debt exposure of group companies by March 2019 (source: Business Standard). This infrastructure group, with a large footprint and massive debt, has been repeatedly accused of gold-plating projects in several states. 
 
While everybody has stories about IL&FS’s inefficiencies, very few are willing to speak openly, or on record, because IL&FS and its network of 174 direct and indirect subsidiaries, joint ventures and associate companies has an army of powerful former bureaucrats and politically connected persons on its payroll as employees, consultants, advisers and directors.
 
In the circumstances, the fact that an independent director and audit committee head of a 50:50 joint venture with a state government (that, too, Gujarat) chose to take the matter to court on behalf of the people of Gujarat is bold and admirable.
 
My article provoked a sneaky reaction from GIFT City, which provides an insight into the hostile reaction that DC Anjaria, a highly regarded senior finance professional, is up against. Moneylife had asked GIFT City as well as Hari Shankaran, vice-chairman of IL&FS (who is now occupying the chairman’s office without a formal appointment) for comments before we published our report of 8th August. Neither of them has responded so far. 
 
Instead, on 13th August, Ajay Pandey, the MD and CEO (managing director and chief executive officer) of GIFT City, chose to respond through a advertorial by a third-party (Skoch Development Foundation), published in Business Standard (see image). The advertorial about Gift City included a half-page interview of Mr Pandey, which makes no reference to Moneylife while countering the charges made by Mr Anjaria reported in my column. A Skoch representative confirmed that Mr Pandey’s interview was to counter Moneylife
 
 
The advertisement, in the form of an interview, had a screaming headline: “Allegations are false, malicious, factually incorrect and misleading”. Since an advertisement apparently does not have to follow editorial norms, it does not say who made the allegations or where they were published. 
 
Much of the interview is a defamatory attack on the petitioner, Dr Anjaria, ascribing motives to his courageous whistle-blowing. In the process, Mr Pandey glosses over key facts and details, which are part of the PIL. This column will not go into the allegations against Mr Anjaria simply because he and his lawyers are in the process of taking up the matter of his defamation with GIFT City, Mr Pandey and the newspaper. 
 
What is of concern is that the MD&CEO of a joint venture with a state government has breezily made several factually inaccurate statements mainly to defend the financially beleaguered IL&FS, whose giant debt exposure is worrying RBI. Here are some of the issues with Mr Pandey’s advertorial interview. 
 
The main allegation in Mr Anjaria’s PIL against GIFT City is that IL&FS, a 50% partner, picked a consortium led by an entity called Fairwood Holdings, without following due processes, to prepare a master plan, concept and design. This was done before GIFT City formally came into existence. 
 
The backdated contract was pushed for ratification by the GIFT City board of directors without even tabling the contract at the meeting. Further, that Fairwood Consultants were paid over Rs400 crore in fees and did not deliver on their contract.  
 
Mr Pandey, in the advertorial, responding to Moneylife’s article, alleges that Mr Anjaria was an independent director throughout the period when the contract was awarded and acquiesced with the decisions. 
 
He cleverly does not provide any dates, although the PIL (copy available with us) is packed with details and chronology of events, the formation of GIFT City and how the contract was brought to the board. Nor does he answer the simple question of whether bids were invited, in line with the Gujarat Infrastructure Development Board’s guidelines, before handing out the contract. 
 
Mr Pandey ends up proving Mr Anjaria’s allegations—of the lack of competence of Fairwood Holdings to handle the project—by admitting that the contract was terminated within two years of its appointment—putting paid to the claims that it was selected after great deliberation.  
 
Further, he says that GIFT City is in arbitration with Fairwood Holdings to “recover money paid for work not done by the consortium.” Anyone with any dealings with the state or Central government knows what a Herculean task it is to recover even legitimate reimbursements. And, yet, here is GIFT City, a 50% state undertaking, saying it is in arbitration with Fairwood since December 2014 to reclaim money paid for work that was not delivered. 
 
Mr Pandey says that 25 hearings have already taken place and the next one is scheduled for 25th August—two days hence! Since arbitration tends to be an expensive process, it is pertinent to ask how much GIFT City has spent on these 25 arbitration hearings over four years, because it apparently failed to choose the a major consultant with adequate due diligence. 
 
Perhaps deliberately, there is no mention of the sum claimed from Fairwood by GIFT City through arbitration. Sources tell us it is a whopping Rs5,740 crore. And, yet, we understand that the balance-sheet of Fairwood, as on 31 March 2010, showed that it had a net worth of Rs77 crore. What does this tell you about Gift City’s chances of recovering anything from Fairwood? My sources say that Fairwood has not even been paying salaries to its employees on time. 
 
So, is the expensive arbitration meant to cover up a bad decision and how the consultant was selected? Meanwhile, typical of IL&FS’s projects, the cost of the project has soared from Rs25,000 crore in 2008 to over Rs70,000 crore and the project itself looks very different from the original videos available on YouTube. The irony is that Mr Pandey, who chose a half-page advertorial to defend the deal, wasn’t even with GIFT City when the contract was awarded.
 
Here’s another shoddy falsehood by the Gift City MD&CEO. In response to a question, he says that the PIL No 260 of 2015 in the Gujarat High Court (filed by Mr Anjaria) is “against GIFTCL (GIFT City), IL&FS and the Government of Gujarat.” On the contrary, Mr Anjaria had strategically ensured that the Government of Gujarat is not a party to the litigation—in fact, he considers it to be a victim. 
 
 
That the MD&CEO of a large and prestigious joint venture of the government would make such a silly mistake in an advertorial to defend the project, smacks of arrogance. It also raises questions about the causal manner in which he has chosen to defame the petitioner, who was selected as an independent director because of his contribution to the very concept of Gift City. It is shocking that the head of a government venture would resort to such a stratagem and distortion. 
 
My sources believe that Mr Pandey’s interview was at the behest of IL&FS, a company that ought to be focusing on reducing its debt, answering questions raised by a whistleblower, and drastically shedding or closing down pointless ventures which it had no business starting in the first place. 
 
Here is a rectification published on 7 September 2018 by the same newspaper
 
 
And a rejoinder to the advertorial...

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COMMENTS

sachchidanand

3 months ago

Thanks Sucheta for exposing ILF&S who are already known to be inefficient ..Keep it up

Sunil Gidwani

3 months ago

very well said Sucheta. Knowing your and Mr. Anajaria's reputation there is no need to doubt anything you have said but I guess no one will easily accept allgations of any wrong doings because its a PM's pet project

sharafuddeen

3 months ago

Sucheta ji, another pandora's box u have opened. I have not read your 08 Aug. article. IL&FS is an institution I attempted to borrow in year 1997 for a large then innovative project in Kerala. Their own due diligence was questionable, when they started to analyse our project. We were all NRIs & were not enjoying political patronage from even in-active political party. Yourself & Mr.Anjaria deserve to be decorated with nothing less than highest civilian honour. Congrads.

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