IL&FS Board Expresses Intent To Honour Ring-Fenced SPV Structure

Infrastructure Leasing and Financial Services group said its subsidiaries operating projects will honour their financial liabilities in a structured way as it looks to quell uncertainty about repayments by special purpose vehicles generating cash.

The government-appointed board will pursue a three-tier asset-level resolution strategy to deal with the impending bankruptcy of the infrastructure financier, according to the ‘Third Progress Report’ filed with the National Company Law Appellate Tribunal—BloombergQuint has reviewed a copy. This entails immediate payments by those SPVs that can completely fulfill their financial obligations. Others that are not fully capable of honoring payments immediately will do so upon resolution but in a manner which respects the established credit hierarchy.

The clarification follows widespread concern among investors and analysts after two SPVs— Jharkhand Road Projects Implementation Company Ltd. and West Gujarat Expressway Ltd.—chose to default on debt despite adequate cash. Both the entities had earlier written to their trustees demanding refund of payments made after Oct. 15 citing moratorium granted by the appellate tribunal to the group.

The IL&FS board, in its plan, said that it intends to divide its special purpose vehicles into three categories:

• Category 1: Which can pay all debt obligations as and when due. These entities will continue to make debt payments to all lenders.
• Category 2: That can only pay their operational and senior secured debt, and not all financial obligations.
• Category 3: Which cannot fully repay even the senior secured debt obligations.

Entities in the last two categories would not need to service their financial debt till the resolution process of the entire group is completed, according to the plan. But they will follow the process as under the Insolvency and Bankruptcy Code, once cases are admitted, with the seniority of ‘senior secured lenders’ protected. Section 53 of the code protects the rights of creditors and provides a structured distribution of payments from the proceeds of asset sale.

Asset-Level Resolution Plan

The affidavit said the IL&FS Group has a multi-layered structure with 287 companies at the operating level, 14 intermediate holding companies and one parent. About 128 of these are based offshore, for which a different resolution plan needs to be drawn up according to the laws of those countries.

Based on financial evaluations, the board and its advisers found that only 22 solvent entities in the group falling in category 1. They are involved in securities services (2), road construction and operations (2), wind power (7), solar (1), water (3), real estate (1) and fund management (6).

A process in line with the provisions of the insolvency code will be followed—creditors can file claims with a resolution professional and bids would be invited and evaluated by a committee of creditors, according to the affidavit.

For a category 3 company, or if there are no bids are received for a category 2 company, the board will approach the Ministry of Corporate Affairs to wind it up.

The board decided to sell assets or SPVs given the challenge in a group-level or vertical resolution because of the complex structure of the group, according to the affidavit. This would involve the sale of a business vertical comprising a basket of companies or the sale of specific operational projects or assets.

A key part of the asset-level resolution is that “no interest, additional interest, default interest, penal charges, or other similar charges” that have accrued after Sept. 30, 2018 will be taken into consideration will admitting claims from creditors.

That could prove to be an issue for financial and operational creditors of IL&FS that haven’t received payments after the group began defaulting last year, forcing the government to take control of the infrastructure financier.

Supervised Process

Meanwhile, on Monday, the government proposed the name of retired Justice DK Jain to oversee the sale of IL&FS entities. The government has requested that the judge be tasked with ensuring competitive, fair and transparent sale of assets of IL&FS and its subsidiaries, Bloomberg News reported on Monday morning.