IL&FS has no option but to sell its profitable financial services unit as it tries to avoid bankruptcy

• India’s largest infrastructure lender is said to be planning the sale of a majority stake in its financial services subsidiary in order to meet its immediate debt payments.
  
• However, investor demand for IL&FS Financial Services is expected to be muted since the unit has defaulted on a number of loans and has significant cash flow problems.
  
• The news comes a few days after Life Insurance Corp of India (LIC), a state-owned insurer, agreed to extend a ₹40 billion lifeline to IL&FS.
  
  

A few days after Life Insurance Corp of India (LIC), a state-owned insurer, agreed to extend a ₹40 billion lifeline to Infrastructure Leasing and Financial Services Ltd (IL&FS), the country’s largest infrastructure lender is said to be planning the sale of its financial services subsidiary in order to meet its immediate debt payments, sources told Mint. Apart from the injection from LIC, IL&FS plans to raise an additional ₹45-₹50 billion by divesting and liquidating assets.

IL&FS is offloading a majority stake in its financial services subsidiary, IL&FS Financial Services, which earned nearly ₹1 billion in profits in the previous financial year. It has hired SBI’s investment banking division to broker the sale.

However, demand for a majority stake in IL&FS Financial Services is expected to be muted since the unit has defaulted on a number of loans and has significant cash flow problems owing to cost overruns, delayed project approvals and contract disputes.

Earlier this month, the Reserve Bank of India (RBI) placed a ban on the financial service unit’s access to commercial paper, or additional unsecured, short-term debt, until February 2019 after it failed to meet its commercial paper obligations at the end of August. In addition, the RBI gave IL&FS Financial Services to reduce its debt exposure to all IL&FS subsidiaries by March 2019.

Bankruptcy risk

IL&FS, which had around ₹910 billion in outstanding debt at the end of March 2018, is in a race against time to avoid bankruptcy as a number of debt obligations are about to mature. It is currently seeking ₹160 billion in outstanding dues from the Indian government for work it has completed.

Given IL&FS’s status as “systemically important”, it is in the government’s best interest to prevent the infrastructure lender’s bankruptcy. If IL&FS fails, a lot of creditors will not be able to recover their loans, which will exacerbate the bad loan crisis. Furthermore, the bankruptcy of IL&FS will slow down the central government’s infrastructure push.

The shareholders of the company, which include LIC, HDFC and SBI, will only be confident about investing more money into it once it demonstrates an ability to turn its operations around. IL&FS’s shareholders are expected to vote on LIC’s proposed bailout plan at the end of the month.