By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed IL&FS Infrastructure Debt Fund’s (IIDF or the fund) three Series-1 mutual fund schemes Series-1A, Series-1B and Series-1C at ‘IND AAAidf-mf’.

IL&FS Financial Services Ltd (IFIN; ‘IND AAA’; Outlook Stable) has set up an infrastructure debt fund (IDF) under the mutual fund route, which will be governed by the mutual fund regulations of the Securities and Exchange Board of India (SEBI). After receiving all the necessary approvals in October this year, activities are underway to transfer the ownership of asset manager and trustee company from IFIN to IL&FS Investment Managers (IIML), a subsidiary of IL&FS Limited. The ownership and management control of the IDF would remain within the IL&FS Group as the ultimate controlling shareholder in both entities IFIN and IIML. The IDF (Series 1) has raised a corpus of INR7.5 billion from domestic investors on a private placement basis. The amount is spread over three schemes – INR2.32 billion for scheme A, INR2.35 billion for scheme B and INR2.8 billion for scheme C with tenors of five, seven and 10 years, respectively. The units were fully paid and subsequently listed on the National Stock Exchange. The schemes offer both dividend and growth options to its investors.

KEY RATING DRIVERS

The rating benefits considerably from being part of the IL&FS Group. Infrastructure Leasing & Financial Services Ltd (IL&FS, ‘IND AAA’) is among India’s premier financial and infrastructure institutions with an established presence across the infrastructure spectrum as developer, financier and operator. Additionally the proposed new sponsor IIML has  expertise in managing investments across sectors including infrastructure and the IDF team will benefit from the IIML team’s management expertise in both operating as well as divestment of assets. IIML has been a first-mover in the Indian infrastructure private equity (PE) space since late 1990s and managed several pioneering infrastructure investments in sectors such as telecom, waste management and city gas distribution. IIML also has extensive fund raising and management experience with Indian as well international institutions, which can be leveraged by IDF for further fund raising.


At end-October 2016, the fund invested the entire corpus in the non-convertible debentures of eight projects/companies which have presence across diverse sectors. Around 1.38% of the corpus is invested in liquid instruments. Ind-Ra believes that the sponsor’s INR1.25 billion investment in the corpus demonstrates its confidence in IDF’s prospects.


In the agency’s view, the investment manager IL&FS Infra Asset Management Company Ltd (IIAML or the asset management company) possesses impeccable credentials drawn from its sponsor pedigree that would reflect in its management of IDF. Understanding the skills in financial services is a critical ingredient for the commercialisation of infrastructure. IL&FS shaped its financial services division to cater to this critical need. IL&FS has a significant focus on investment banking, asset management and infrastructure financing. The investment manager has benefitted from the vast and specialised expertise of more than 25 years of the IL&FS Group in the infrastructure sector.


The fund’s investment management policies and risk management systems including control through internal auditing – all supported by a comprehensive compliance manual – are deemed robust and conducive to help it achieve its objectives. Board sub-committees have oversight over IIAML’s key functions.

 

Ind-Ra believes that the fund, pursuant to its investment criteria, has created a balanced and diversified portfolio within the overall ambit of the prescribed investment guidelines.


The fund’s strategy of co-investing with few other investors should help it secure favourable transaction structures. It will also play an active role, where necessary, to ensure investee entities perform according to expectations. If one or more of the portfolio investments are stressed, IDF will quickly step into exercise creditor rights to harness IDF’s long-term economic value. This is characteristic of several infrastructure projects despite the short-term volatility in performance or cash flows.


RATING SENSITIVITIES

Portfolio composition and characteristics not conforming to Ind-Ra’s expectations could trigger a negative rating action. Any sharp deterioration in the credit quality of investments that could permanently impair recovery prospects within the tenor of the schemes could also result in a downgrade.


A full rating report will shortly be available on the agency’s website www.indiaratings.co.in.



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.


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Analyst Names

  • Primary Analyst

    Ratnam Raju Nakka

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001742

    Committee Chairperson

    Venkataraman Rajaraman

    Senior Director and Head Infrastructure and Project Finance
    +91 44 43401702

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121