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 IL&FS’s obligations as implicitly sovereign-backed.
That assumption may get tested. Before the government stepped in, it was pretty clear that IL&FS 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, according to a Sept. 27 report by REDD Intelligence.
Now that the government is backing its liabilities, IL&FS 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 bigger rights issue. 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 IL&FS 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 IL&FS has left behind.
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