INSUBCONTINENT EXCLUSIVE:
Even before it went belly up, India's ILFS Group was a strange fish: A private infrastructure financier that lent to risky projects it
also owned, while throwing around the weight of nonexistent state connections to mask a multiyear liquidity squeeze.It was only when the
creature was dead to the markets that the authorities took note of the risk to Indian finance
As investors were repelled by the lender's insolvency, New Delhi moved decisively Monday to clean up the mess
Unless the government-supervised rescue comes unstuck for some reason, it's safe to say that India's mini-Lehman moment has been
averted.ILFS isn't being nationalized, at least not yet
Existing shareholders, including India's Life Insurance Corp., Japan's Orix Corp
and Abu Dhabi Investment Authority, continue to own Infrastructure Leasing Financial Services Ltd., the unlisted parent
However, the old board has been replaced by new government-nominated directors
Among them is banker Uday Kotak, who'll most likely lead the unscrambling of a group that has 169 subsidiaries, associates and joint
ventures.When New Delhi says it aims to "immediately stop further financial defaults and also take measures to resolve defaulted dues to the
claimants," it's hoping taxpayers' money won't actually be needed
The commitment alone should be enough for the debt market to treat ILFS's obligations as implicitly sovereign-backed.That assumption may
Before the government stepped in, it was pretty clear that ILFS wasn't going to be trusted by the markets with even a cent in new loans
As for a 45 billion-rupee ($600 million) rights issue, proposed by the old management and cleared by the shareholders on Saturday, that
money would also have disappeared into a black hole, given that the equity infusion required to steady the ship is around $4 billion,
27 report by REDD Intelligence.Now that the government is backing its liabilities, ILFS presumably can survive on a thinner layer of equity
than it would have otherwise needed
There'll be less pressure from markets to sell assets like roads, tunnels and power plants at throwaway prices, and time for the group to
fix its bloated balance sheet more sensibly.Some deleveraging will still be required, particularly for nonperforming energy and transport
projects already facing bankruptcy proceedings
Writing off 20 percent of the group operating companies' nonfinancial assets of $10 billion would mean a $2 billion hit, in REDD's
estimates, when the current equity cushion to support the infrastructure business is not even half as thick.That raises the possibility of a
If national champions like Life Insurance Corp
and State Bank of India were to play a disproportionately large role in filling that capital hole, nationalization of ILFS would be
complete.However, with general elections due next year, and the opposition Congress Party already attacking the government over the bailout,
the scope to utilize state-run institutions' funds may be limited
Besides, forcibly diluting international investors won't make it easy to tap them for future projects.Keeping the market for Indian
infrastructure assets open and attractive will be Kotak's bigger task
But that must wait until the tanks are clean of the mess ILFS has left behind.(Andy Mukherjee is a Bloomberg Gadfly columnist covering
industrial companies and financial services
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.
