Distressed-debt specialist firm, REDD Intelligence, has warned that beleaguered infrastructure financier, IL&FS, will require equity infusion of up to Rs 300 billion to get back on the rails. It will also have to take an impairment of at least Rs 150 billion before recovering a single rupee from its subsidiaries, the firm said.
“The required equity infusion could be in the range of Rs 225-300 billion, much higher than the proposed Rs 45 billion rights issue,” it said. “We estimate the equity required to right-size the balance sheet is Rs 295 billion, which is equal to the standalone borrowings at IL&FS and ITNL. Excessive holding company leverage was used to finance parent contributions in operating subsidiaries,” it said in a report dated September 27.
REDD Intelligence estimated that IL&FS Financial Services (IFIN) and other financial subsidiaries of the group have Rs 250 billion in financial assets and Rs 30 billion in equity, which it says may be sufficient, barring requirements of capital on the account of group loans. IL&FS’ consolidated fixed assets, including concessions, are Rs 610 billion, which, based on leverage of two times (debt to equity), requires an equity contribution of about Rs 203 billion. IL&FS also has Rs 87 billion in equity investments, loans and advances, and receivables from associates, which should form part of equity and should not be leveraged. Summing up, all three would bring the total equity requirement to Rs 320 billion, it said.
IL&FS has a current shareholder fund of Rs 93 billion, leaving the required estimated equity infusion at Rs 227 billion. “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 billion. This is very high, at Rs 115 million per Mw, compared to the industry benchmark of around Rs 80-90 million per Mw. Insolvency proceedings have also been against this subsidiary by its lenders. Adding capital required for IFIN with respect to loans to group companies and impairment for assets, to the extent of Rs 227 billion calculated above, makes the Rs 300 billion in new capital a reasonable number,” it said.
REDD Intelligence has estimated that IL&FS will have to take high impairment for its assets on account of its 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 to NCLT for insolvency. “Besides, we estimate the Rs 5.5 billion in exposure to associates like Hill Country Properties, Dighi Ports (currently in insolvency) and IL&FS Engineering (also filed into insolvency) to have limited recoveries and, therefore, require impairment. We estimate that a Rs 12-14 billion write-off is required at its large subsidiary Chenani–Nashari Tunnelway. We have ascribed a value of Rs 34-36 billion versus the project value of Rs 48 billion on the company’s books, by discounting the annuities from the project at 12 per cent,” the firm said.
REDD has estimated a write-off even may be required for IL&FS’s Rs 18-billion exposure to subsidiary IL&FS Maritime Infrastructure, which has high related-party transactions and which reported a loss of Rs three billion. It said the related-party loans in most cases are subordinated in the capital structure and in bankruptcy process.
Therefore, the firm has estimated that IL&FS has Rs 300 billion in loans at risk given to its subsidiaries.
“Given the second-lien nature of the secured loans at IL&FS parent and IL&FS Transportation Networks Limited (ITNL) parent, recovery could be constrained by the quality of the collateral, such as equity pledges from operating subsidiaries,” it added.
