IL&FS MF's exposure under scanner; firm says in good position to repay dues

Sebi | Photo: Kamlesh Pednekar
The IL&FS group has come under scanner of the Reserve Bank of India (RBI) because of its exposure to group firms and mounting debt burden. However, sources said market regulator Securities and Exchange Board of India (Sebi) may also step in. The bone of contention is IL&FS Infrastructure Debt Fund’s (IDF) high exposure to its own group’s renewable businesses.

The IDF, run by IL&FS MF, has more than 30 per cent of AUM in two of its schemes exposed to IL&FS Solar Power and IL&FS Wind Energy (IWEL). The IDF Series 2B has 31 per cent of its AUM exposed to non-convertible debentures of the two renewable companies. Series 2C has 30.29 per cent of its AUM exposed to NCDs of the two firms. 

Investments made by IL&FS IDF in group assets may have not breached regulatory norms. However, the latest episode has put a spotlight on whether such investments in group assets are being made in the right spirit of the regulation.

“Currently, multiple investors are interested in the 51% stake (held by IWEL) and a global process is underway to identify a buyer. The target is to complete the sale on or before March 31, 2019. With the proceeds, IWEL will repay IL&FS IDF in its entirety,” the firm said in its response. 

Disclosures by IL&FS MF show that as on March 31, 2018, each of the seven debt fund series had an exposure of more than 20 per cent to either of the two firms, or to both combined. Overall, one-fourth of these schemes’ total AUM is exposed to the two firms. Both entities are currently making losses. According to the latest annual report, IL&FS Solar Power made losses to the tune of Rs 33.65 million, and IWEL Rs 829 million in FY18, even as certain debt programmes of parent IL&FS have been downgraded to junk status.

Rating agency Icra on Monday downgraded non-convertible debentures of both group entities, while revising ratings outlook from stable to negative.

Experts say the latest developments could be a setback for the IDFs, a new instrument designed to attract long-term financing for infrastructure projects. IL&FS MF-IDF is the largest one in the country with 74 per cent of assets as of March 31.

“Diversification is quite important. Concentrated bets can be risky as besides the company’s fundamentals, policy changes can also impact prospects,” said Shubham Jain, vice-president and group head (corporate ratings) at Icra.

While downgrading IL&FS Wind Energy from A+ (SO) to BB+ (Negative), the rating agency highlighted the risks the company faces. 

“The company remains exposed to high debt refinancing risk with almost Rs 1 billion debt servicing obligations (principal and interest) due in April 2019. IWEL, on a consolidated basis, further remains exposed to the risk of variability in cash flows due to the wind pattern and grid availability, given the single-part nature of the PPA tariff for its SPVs,” the note said. It added exposure to state-owned distribution utilities makes the company vulnerable to counter-party credit risks.

On IL&FS Solar Power, it said: “The rating remains constrained by the limited track record of operations of the solar plant as well as high leveraging level of the company, as the entire project cost is funded through a mix of external loans and IL&FS Group debt. The ratings are also constrained by the high debt refinancing risk, with almost Rs 4.5 billion debt due for refinancing during H2 FY2021.”

Meanwhile, Care Ratings and India Ratings, who had highest rating on most of IL&FS MF’s IDF schemes (CARE AAA MF-IDF, IND AAAidf-mf), said they are currently reviewing their rating of the various schemes. Care said its rating does not comment on the creditworthiness of the fund. India Ratings said: “Given the sponsor’s current situation, we are reviewing the portfolio for any impact because of the sponsor’s profile, on the investment management.”