INSUBCONTINENT EXCLUSIVE:
A credit crunch facing Infrastructure Financing and Leasing Services Ltd (ILFS) has roiled the nation's financial markets in recent days,
triggering concerns about risk in the rest of the country's shadow banking sector.Below is an outline of what the company does and the
problems it faces.WHAT IS ILFSILFS was floated by government-controlled entities, including the Central Bank of India, Unit Trust of India
and the Housing Development Finance Corp in the 1980s.Thanks to India's massive infrastructure financing and development needs, the company
grew from a small road building and operating firm to an infrastructure giant in three decades.As Prime Minister Narendra Modi in 2014-15
announced a major programme to build highways, roads, tunnels, affordable housing and renewable power generation across the country, ILFS's
ambitions grew and it was one of the biggest beneficiaries of the drive.It has won several of these projects, either through direct bidding
or joint ventures, but has taken on heavy debt as a result.Its subsidiaries include transportation network building subsidiary ILFS
Transportation Networks Ltd (ITNL), engineering and procurement company ILFS Engineering and Construction Co Ltd and financier ILFS
Financial Services Ltd.Until early August, it had a AAA rating from credit rating agencies largely thanks to its place at the centre of
government infrastructure plans and its robust list of top shareholders.ILFS's major shareholders include state-backed Life Insurance Corp
of India holding 25.3 percent stake, State Bank of India with 6.42 percent, Japan's Orix Corp holding 23 percent and the Abu Dhabi
Investment Authority with 12 percent, according to the company's website up to the end of the financial year to March 2018.This has helped
ILFS to secure funding from investors.WHAT WENT WRONGIn summary - the company piled up too much debt to be paid back in the short term while
revenues from its assets are skewed towards the longer term.ILFS first shocked markets when it postponed a $350 million bonds issuance in
March due to demand for a higher yield from investors.Under increasing pressure from the Reserve Bank of India to identify and deal with bad
loans quickly, the country's banks were wary of extending and rolling over loans if the credit risks were high
This made it more difficult for ILFS to refinance its debt as it came due.ILFS' net debt to earnings before interest, tax, depreciation and
amortisation, a measure of a company's ability to pay debt through its operating income, was hovering around a ratio of 11 at the end of
March 2018, based on data from the company's latest annual report
Analysts consider anything above 5 a red flag.Then came a string of rating downgrades, beginning in June.The board of ILFS then rushed to
approve a rights issue of 45 billion rupees to be completed by October
The board also sought to recapitalise ILFS Financial Services, ITNL and three more smaller subsidiaries
The rights issue will close in October 2018.The company said in its annual report that because many of company's claims and other payments
involved government contracts it might take two-three years to get these resolved.By the middle of September, ILFS and ILFS Financial
Services had a combined 270 billion rupees of debt rated as junk by CARE Ratings and a further six group companies had suffered downgrades
with a negative outlook on another 120 billion rupees of borrowings.WHAT ARE ITS MAJOR PROJECTSILFS is an anchor investor and co-developer
of Gujarat International Finance Tec-City (GIFT), where it is building 7.77 million square feet (msf) of commercial and residential
space.Its ITNL subsidiary has the contract to build a 14.2-km tunnel to connect the northern city of Leh to Kashmir
The work on this is yet to start.According to a February presentation to analysts, the group is also the largest company in India
constructing roads on a build-operate-transfer basis, with 26 operational and seven projects under construction.Its energy operation is
developing up to 13,600 megawatts (MW) of capacity including 5000 MW from a solar park in a joint venture with the Rajasthan
government.DEFAULTS LEAD TO CONTAGION THREATILFS has revealed a series of delays and defaults on its debt obligations and inter-corporate
deposits.On Friday, ILFS said it was unable to service its obligation towards a letter of credit to IDBI Bank Ltd.This has raised concerns
about the possibility of further defaults hitting mutual funds with exposure to ILFS and its group companies.Twelve asset management
companies through 32 funds held an aggregate 22.83 billion rupees in debt securities of ILFS and its subsidiaries at the end of August,
according to analysts at Morningstar.Some of them have already marked down those investments as bond prices crashed, according to fund
headline, this story has not been edited by TheIndianSubcontinent staff and is published from a syndicated feed.)
