Infrastructure companies are battling rising costs and lower margins have another cause for concern - escalating debt. But in order to reduce debt many companies are taking in more leverage then they can handle,
report CNBCTV-18's Ronak Jain and Ashwin Raghunath.
It's no longer a smooth ride for IL&Fs Transport as the company confronts rising financing cost for its road projects. In fact, most road infrastructure players are facing similar speed breakers and have been forced to put their project execution on hold due to lack of funds. The companies are now devising new ways to reduce their debt.
Harish Mathur, CEO, IL&FS Transport, said, "In one of the projects, we devised a new method of issuing debentures to reduce the debt. The search is is on to find other ways."
But ratings agency ICRA is concerned. The agency believes infrastructure companies are resorting to complex financial structures of holding companies and special purpose vehicles (SPV) in order to ease pressure on their balance-sheet and secure more funding. And a company which may be levered three times at the SPV level could actually be levered up to seven times in reality.
Anjan Ghosh, group head - corporate sector ratings, ICRA, said, "Often one may have to go beyond the apparent debt-to-equity ratio in an SPV and look at the consolidated leveraging of not only the SPV that is operating the project, but also the holding company because very often equity which is shown in the SPV actually may have been raised at least partly as debt at the holding-company level."
This double leveraging, which takes debt to a much higher level on a consolidated basis, is a cause of concern.
This also increases the overall risk profile and could affect future funding as well. With levels of corporate debt restructuring reaching record highs, banks are now likely to become more cautious in financing multiple SPVs.
This could end up with infrastructure companies having little option than to consolidate their projects and liquidate stake to reduce debt.
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