Global infrastructure funds, private equity groups and opportunistic investors are queuing to pick over the assets of India鈥檚 debt-laden Infrastructure Leasing and Financial Services (IL&FS).
鈥═heir interest may bring a silver lining to the unfolding crisis involving the country鈥檚 leading infrastructure lender, which has defaulted on payments. The event has brought unwanted attention just as the 10th anniversary of the Lehman Brothers collapse passes.
The unfolding drama is causing a firestorm in India鈥檚 financial sector, but most global investors are sanguine about what they see as a 鈥渃ontainable鈥� domestic crisis.
鈥═he reality is that it is too early to make a call.鈥�
Some say the crisis is specific to IL&FS, a huge conglomerate with almost 170 subsidiaries and special purpose vehicles (SPVs) which own more than 13,000km of roads valued at Rs1.8trn (鈧�22bn).
鈥⊿o far, the crisis has affected only India鈥檚 financial sector, and observers believe there will be limited impact on consumption and government-led investment 鈥� the two sectors currently driving the economy.
鈥═he defaults have had cascading fallout on the India stock market, wiping out billions of dollars in market value.
Geeta Chugh, a Mumbai-based analyst at S&P Global Ratings, says such a strong reaction by the markets was a consequence of both outflows from debt funds and risk aversion after the IL&FS defaults and the unrelated problems at Yes Bank.
鈥淏ased on reported financials, top-tier finance companies look strong,鈥� he says. 鈥淭hey have low NPLs and good earnings, and, until recently, have enjoyed very high stock-market valuations.鈥�
鈥⊿&P does not expect any material defaults, but it is monitoring the situation.
鈥ˋ large global investor with an Indian strategy says a correction in India鈥檚 finance stock was, in fact, 鈥渕uch-needed鈥�. The investor, already active in India, is known for spotting undervalued companies and buying them to provide investment platforms.
鈥═he most immediate financial cost is expected to be borne by the shareholders of IL&FS, most of which are Indian institutions, including the Life Insurance Corporation of India, Central Bank of India and State Bank of India.
The IL&FS debt problems stem from, in some instances, asset-liability mismatches where borrowers have taken out short-term loans for long-term commitments in infrastructure, according to sources. In other instances, borrowers 鈥渘ot of an appropriate credit quality鈥� have taken out loans, and the lender is unable to recover them.
鈥↖L&FS has debt totalling Rs910bn. It has defaulted three times in recent weeks.
IL&FS has two foreign investors: Japan鈥檚 ORIX Corp and Abu Dhabi Investment Authority. They are the second and third-largest shareholders, with stakes of 23.54% and 12.56%, respectively.
鈥∣ne Indian corporate lawyer says there could be other foreign investors in some of its subsidiaries, but it is not clear how many. 鈥淚t is also not clear to what extent the assets in vehicles, which are solvent, are ring-fenced from the group鈥檚 problems,鈥� the lawyer says.鈥�
The short-term pain will be felt by lenders and bond holders. IL&FS is described as 鈥渁 huge鈥� borrower from both banks and the bond market.
A foreign investor familiar with IL&FS says people doing business with the group had an inkling of problems some months before the first default. Over the past three to four quarters, he says, some of the entity鈥檚 subsidiaries and SPVs began having debt servicing problems.鈥�
鈥淨uestions were being raised about the financial position of the lender, and the situation was deteriorating quite rapidly,鈥� says another executive with close ties to the group.鈥�
During this period, staff movements at IL&FS also raised a red flag. 鈥漌hen senior management start quitting you wonder what is happening to the company,鈥� the executive says.
鈥↖nevitably, the group will have to sell assets to repay debt in coming months. But no one is prepared to speculate on the quantum of assets that will eventually be put up for sale.
鈥═he most possible outcome is that some IL&FS subsidiaries will be declared bankrupt over the next few months. India鈥檚 Bankruptcy Code 2016 was implemented precisely to deal with such situations. Under the code, courts will appoint insolvency professionals to conduct an orderly auction process for the sale of IL&FS infrastructure assets.
鈥ㄢ�淭his is the most logical course of action, but the process will take time,鈥� says an observer. 鈥淚f the bankruptcy court gets involved over the next six months, as the new law requires, once they start to dispose of the assets it is quite possible that all lenders may actually recover a reasonable proportion of the money against the principal 鈥� but not the interest [owed].鈥�
鈥═he Mumbai-based executive, who heads the Indian operations of a large foreign investor, says it is generally believed a 鈥�50% haircut鈥� is likely on the sale of assets.
For expediency, and to shore up market confidence, the Modi government may choose to fast-track resolution of the debt crisis. 鈥淭he government writes the law of the land. It can do what if feels is best,鈥� the source says.
With both the State Bank of India and Central Bank of India as large shareholders and lenders, pressure could be exerted, albeit indirectly, through either or both banks in their role as shareholders or lenders to force IL&FS to offload assets quickly to settle debt obligations.
鈥ˋs part of its recapitalisation, IL&FS may also be forced to bring partners into the business.鈥�
Sources describe IL&FS assets as a 鈥渕ixed bag鈥� with some 鈥減retty decent assets鈥� and others that are will require development work before they begin to generate cash flows.
鈥═here is speculation that global investors such as Brookfield, large global pension plans and sovereign wealth funds that already own Indian infrastructure projects, could be buyers of some IL&FS assets.
鈥↖ndian infrastructure assets are hotly contested among foreign investors looking to what is a fast-growing country with a young population.鈥�
One North American investor says his firm would be watching valuations and, when they start to look 鈥渕ore attractive鈥�, could move into the infrastructure space.
鈥↖nvestors dismiss as 鈥渁larmist鈥� comments that the IL&FS crisis may turn into India鈥檚 Lehman Brothers. They point out that, as well as the government moving to stem an economy-wide fallout, its largest investor Life Insurance Corporation of India has said it will not allow IL&FS to collapse. It is exploring options to revive it.
