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New IL&FS board faces challenges to recover from India's biggest nonbank failure

➤ Infrastructure Leasing & Financial Services Ltd. expects to resolve between 55% and 60% of its nearly 1 trillion rupees debt.

➤ The resolution process has been delayed by the complexity of the group, which spans 347 entities, in the coronavirus pandemic.

➤ IL&FS says its resolution could be a benchmark for restructuring of large lenders.

The resolution of India's IL&FS is taking longer than expected, underscoring the complex nature of the nonbank lender whose default two years ago exposed several structural issues of the sector. The coronavirus pandemic added to the company's troubles with asset valuations declining and bidders walking out.

In order to contain systemic risk on the financial market, the Indian government took over IL&FS in October 2018 after several of its group companies defaulted on their loan obligations. Former directors at unit IL&FS Financial Services Ltd. were accused of facilitating money laundering and causing losses to the company.

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C.S. Rajan, managing director, Infrastructure Leasing & Financial Services Ltd.
Source: Infrastructure Leasing & Financial Services Ltd.

As of June 2020, IL&FS had addressed about 176 billion rupees of its debt via asset sales, repayments and debt discharged. The company said July 20 that the aggregate value of the debt being addressed now is 570 billion rupees, of which it expects to resolve about 505 billion rupees by March 2021. Its total debt was about 1 trillion rupees.

The resolution of IL&FS may become a benchmark for similar restructuring of large failing lenders in future, Managing Director C.S. Rajan tells S&P Global Market Intelligence in his first interview since the government appointed a new board to take over the company.

S&P Global Market Intelligence: Does IL&FS accept that the resolution is taking longer than initially estimated and how confident are you about the revised timeline?

C.S. Rajan: This is the first time that such a massive group resolution has been attempted in the history of corporate India. The new board of IL&FS has had to keep in mind the interests of varied stakeholders present across levels, while upholding principles of corporate finance.

These [resolution] targets have been drawn up after a comprehensive review of the progress that has been achieved and the stage at which we are at currently for multiple other processes. We are deeply committed to achieving the communicated milestones and will be sharing an update at the end of each quarter.

How has the COVID-19 pandemic affected the resolution process?

Unfortunately, we have not been immune to the effects of COVID-19 and its repercussions. One such example is that the Pune-Sholapur road SPV, for which we had received the highest binding bid from a large Italian company in the roads sector. However, owing to complications arising out of COVID-19, among other developments, the Italian company decided to withdraw from the sale process. As a result, the new board had to evaluate an alternative resolution plan for the SPV.

Another key area where COVID-19 has had a considerable impact is on the sale process for IL&FS Group's real estate portfolio. Having said that, the group completed the resolution process for GIFT City [a financial technology park in western Gujarat state] during the lockdown period. This resulted in over 12.50 billion rupees of IL&FS Group debt getting addressed.

What were the main challenges the new board faced in the resolution process?

Challenges have been faced on account of the complexity of the IL&FS Group and uniqueness that such a large group with varied stakeholders and large amount of debt presents. Add to that the absence of a legislative framework governing group resolutions. With respect to the sale process, running multiple processes simultaneously, onerous commercial arrangements with counterparties and the weak external environment have posed challenges. COVID-19 has had an impact as well.

How much of its debt does the company expect to recover finally and how does it compare with other insolvency resolutions?

We expect overall debt resolution to be between 550 billion rupees and 600 billion rupees, which is nearly 60% of the overall debt. This compares favorably with the average realization of 47% to date under the [Indian] Insolvency and Bankruptcy Code process. The realization represents the true value of underlying assets, as established in most cases through publicly run processes, benchmarking against independent fair market valuation obtained from independent valuers and obtaining approvals from the respective creditor committees.

Do you think IL&FS' resolution can become a template for future resolution of nonbank financial companies?

IL&FS was a test case for group-level resolution in India when the new board was installed in October 2018. With the resolution framework now approved by the [National Company Law Appellate Tribunal], the learnings will be available, maybe as a benchmark, for future group-level resolutions in the industry.

As of Aug. 11, US$1 was equivalent to 74.61 Indian rupees.