ILFS is bust. It may have some ‘infrastructure assets’ that include roads, right to collect tolls on them, ports, SEZ etc. It has shareholders who include foreign names like ORIX of Japan or Abu Dhabi Investment Authority and Indian names like HDFC, LIC of India, SBI,  Central Bank etc. Any of these shareholders can take control, if they think there is potential to salvage. The process of bankruptcy is painful, since there are lot of assets that have a long life and revenue flows that have been pledged to raise money. IL&FS is not small in size either.

The problems must have come about due to one or more of the following reasons:

  1. Inflated or gold-plated project costs which resulted in high borrowings that cannot be serviced by the loans;
  2. Borrowings profiles are weak. Funding a thirty year revenue stream with a five or ten year loan leaving the company with no money to repay;
  3. 3Lower revenue streams than were anticipated on the various projects;
  4. 4.Poor capital allocation of leveraged money that have gone in to the black hole;

 

It is indeed amazing to see that the company was permitted to issue Commercial Paper! With lumpy revenues and huge long term borrowings to service, this kind of borrowing is built on a presumption that the CP programme will eternally keep getting re-fueled.

The role of the Rating Agencies is truly questionable. The nature of business itself ensured that a CP programme cannot get any investment grade rating. When there were nearly 200 entities and SPVs in place, it is impossible to assess a single entity and assign a rating. Either it was a structured fraud or sheer incompetence. While it is possible for ratings to collapse due to structured frauds, I have not come across many CP failures. In the Lehman boom period, we had property companies issuing CPs in India which defaulted and led to some panic in the MF industry.

The debt papers of this company has a range of investors from MFs to banks to NBFCs. It is certainly large enough to warrant some element of panic. There is a contagion effect which sweeps across the sector. Higher cost of borrowing, squeezing out of weaker players (which can cause further damage) and more tightening. Lower lending, lower personal loans and consequential slowdown. The non-bank sector is an integral part of our growth engine.

With all this in mind, one cannot afford to let IL&FS sink or drift without a resolution. It is clear that the GOI is thinking on these lines and hence the nudge to the LIC to pump in money. Will other shareholders (maybe SBI will toe the government line) pitch in? They might, if they see value in the business at SOME price. The price may be a very low one in the eyes of the other shareholders. So if an ORIX or even a new shareholders comes in with a chequebook, the terms are going to be opportunistic. Perhaps it is in this context that the GOI wants to protect the investments of LIC/SBI? Today, there is no time for due diligence. The need is to get in with money. In this context, I would not bother about control going to ‘foreign’ hands. None of the infrastructure projects can be taken away. They are all subject to supervision by domestic regulatory authorities. I do not think we should sit on ‘national’ pride. We are short of capital. If we can get the money, it is fine.

I raised my voice against LIC pitching in with policyholder money. First of all, this is an unlisted investment with no mechanism for price discovery. Secondly, it is not sure what kind of returns can accrue to the policyholder with this investment. It is true that of all the vehicles, LIC is the one with the biggest pool of money. However, it surely means that the policyholders’ money is being put to high risk. Not something a ‘prudent’ investment manager would do. Of course, each bet that LIC takes is a small part of their corpus and they also have problems in finding large enough tickets to buy in to.

There were reports that ORIX wanted to step in. I think the government should welcome ORIX.

If Orix has experience and expertise in Infrastructure projects, it makes sense. Being a company in the Infrastructure sector, the government always holds the controls, irrespective of nominal ownership. So we should not worry about ‘foreign’ ownership etc.

As a first step, the government can set up a war room with a new board. Remember Satyam? This is a similar case. There are businesses in the entity. It is only a question of value. Maybe a crack board of directors like the one that saved Satyam can happen there. And the government can pump in some initial money based on the cash flow needs. Someone has to put in immediate money to keep the show going. 

Time is of essence. Bad news in the financial sector is always contagious. On optimistic days, money is available to fund the wildest dreams. On days of pessimism, money refuses to see sunshine.

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