Risk For Investors Rises As IL&FS SPVs Choose To Default

IL&FS’ Jharkhand Roads Project defaults on its debt despite having cash, making analysts wary of the SPV-model for infrastructure.

The IL&FS headquarters in Mumbai. (Source: BloombergQuint)
The IL&FS headquarters in Mumbai. (Source: BloombergQuint)

A decision by the Infrastructure Leasing and Financial Services group to allow two of its operating and cash-flow generating projects to default on debt repayments has sparked fresh concerns among investors and creditors.

On Tuesday, two credit rating agencies downgraded the credit profile of the Jharkhand Road Projects Implementation Company Ltd., one of the SPVs within the IL&FS Group, to default status. Both India Ratings and Research and Crisil Ratings downgraded the credit rating on the non-convertible debentures of the road construction company to ‘D’ or default.

The rating agencies said that the NCDs were downgraded on the non-payment of interest and principal obligations by JRPICL, that were due on Jan. 21, 2019.

The default is a manifestation of change in the management’s willingness to pay and the emergence of sharply increasing legal risks over the interpretation of National Company Law Appellate Tribunal’s interim stay order of Oct. 15, 2018.
Crisil Release

The defaults followed a moratorium issued by the National Company Law Appellate Tribunal in October. The IL&FS group appears to have interpreted the moratorium to mean that debt servicing across the group’s SPVs can also be halted

India Ratings and Research in a note last week highlighted the risk of default by JRPICL and the West Gujarat Expressway Ltd., given this interpretation of the NCLATs’ order.

“Two special purpose vehicles of the IL&FS Group, the Jharkhand Road Projects Implementation Company Ltd. and the West Gujarat Expressway Ltd., have sent letters to their trustees demanding a refund of debt payments made by them after Oct. 15, 2018,” India Ratings said in its note on Jan. 15.

Operational IL&FS SPVs Seek Refund Of Debt Payments, Says India Ratings

Default Despite Cash-Flows

According to Crisil, the recent default by JRPICL has taken place despite the IL&FS Group management assuring that payments for the NCDs would not be compromised, as per a resolution plan submitted to the National Company Law Tribunal.

What is of particular concern for the rating agencies is that JRPICL has enough cash-flows coming into the project and the related escrow account to service its debt.

On Dec. 31, 2018, JRPICL had Rs 345 crore worth of surplus cash available to service the debt obligation of Rs 76 crore due in January 2019. The project is likely to generate net cash accruals worth Rs 147 crore by FY20 as against principal debt obligations of Rs 133 crore, according to Crisil.

India Ratings added that, as of Jan. 14, 2019, the road project had adequate cash of Rs 221 crore in debt service reserve account and Rs 109 crore in the major maintenance reserve account, leading to a surplus cash of Rs 128 crore.

Yet it defaulted on the NCD redemption.

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“As per the letter sent by JRPICL to the trustee (on Jan. 4, 2019), the company believes that the NCLAT stay order encompasses normal debt servicing as well. In the trustee's view, the stay is only against lender action (unauthorised set-offs, etc). However, escrow bank has taken a view that payment should be put on hold till clarity emerges on NCLAT's stay order,” Crisil said.

Incremental Debt At Risk

IL&FS continues to have several operational SPVs at various stages of project execution. Should the IL&FS management use the same reasoning to default on dues of other SPVs, the incremental debt at risk will rise significantly.

According to the status report submitted to the NCLT, debt at the operational level stood at Rs 52,861 crore. Of this, Rs 43,179 crore was listed as secured debt. The rest was unsecured debt.

While the extent of likely defaults cannot be judged, uncertainty on the status of this debt has risen.

The Systemic Risk

The perception of rising risk on the debt held by IL&FS’ SPVs is reverberating across mutual funds, banks and the infrastructure sector.

Rating agency ICRA has placed six mutual fund schemes under “rating watch with negative implications” due by their exposure to SPVs of the IL&FS Group. More such actions could follow if other SPVs default.

The government, on behalf of banks, said it would seek easier provisioning norms from the RBI against debt given to cash-generating SPVs.

The infrastructure sector, meanwhile, is questioning whether investors will trust the time-tested SPV structure in the future.

SPV structures are ring-fenced with escrow accounts so that the cash-flows coming into the project are used solely by the developer to repay the debt obligations raised for the specific project or for further investments. This makes lending for infrastructure projects safer.

“Failure to adhere to such structures, which are critical for long-term infrastructure financing, could increase the risk premium on such funding and even put future debt issuances at risk,” said Vishal Kotecha, Associate Director, India Ratings and Research in a note last week.