Case study: a debt-funded group in crisis (IL&FS, 2018)

In simple terms

Infrastructure Leasing & Financial Services (IL&FS) was a large group that financed and developed infrastructure in India, such as roads, power and urban projects. In 2018, group companies began missing payments on their debts. Within weeks, credit ratings collapsed, the government stepped in to replace the board, and the shock spread through India's credit markets.

This case study uses the company's own account of events, public statements by the government and widely reported facts. It is studied for its lessons about debt and group structures.

The structure

The group was large and complex. A government statement at the time referred to 169 group companies for 2017-18, including subsidiaries, joint ventures and associates. Complexity of this kind makes it hard for outsiders to see where debt sits, how cash moves between companies, and which entities support which, as the group structures lesson explains.

The mismatch

Infrastructure projects take years to build and pay back over decades. Part of the group's funding came from short-term borrowing, such as commercial paper and inter-corporate deposits, which must be repaid or refinanced within months.

This asset-liability mismatch is why confidence matters so much for borrowers that fund long-term assets with short-term money, as the interest coverage lesson's discussion of debt risk suggests.

The events of 2018

The government said the group was struggling to service about ₹91,000 crore of debt. The new board pursued a long process of selling assets and resolving group companies.

Wider effects

• Mutual funds holding IL&FS debt had to mark it down, hurting investors in debt funds that had seemed safe.
• Short-term funding markets tightened, particularly for non-bank finance companies that relied on commercial paper.
• Credit rating agencies faced scrutiny; SEBI later penalised several agencies over their ratings of IL&FS.

Why high ratings did not protect investors

Ratings are opinions, based on information available to the agencies, and they can change abruptly. Here, ratings moved from high investment grade to default within weeks. Investors who relied on ratings alone had little warning, as the exchange filings lesson's discussion of rating rationales suggests.

Lessons for investors

1. Match funding to assets. Short-term debt for long-term assets creates rollover risk.
2. Complexity hides risk. If you cannot map a group's debt and cash flows, be cautious.
3. Ratings lag. Read the rating rationale, and look at cash flow and interest coverage yourself.
4. Debt funds are not deposits. Credit events can cause losses in funds that seemed safe, as the equity and fixed income lesson explains.
5. Contagion. One large default can raise funding costs for a whole sector.

Why it matters

The IL&FS crisis shows how debt structure, not just debt size, determines risk, and how quickly confidence can disappear. It matters for anyone analysing lenders, infrastructure companies, groups with many entities, or debt funds.

Limitations

This summary relies on the company's public account, government statements and widely reported facts. Investigations and resolution continued for years, and this lesson does not cover their findings or outcomes. Hindsight simplifies a complicated sequence.

Common mistakes

• Relying on credit ratings alone.
• Ignoring how debt is structured, short versus long term.
• Treating complex groups as if they were single companies.
• Assuming debt funds cannot lose money.

Try it yourself

1. For a company with significant debt, find how much matures within one year and how that compares with its cash and operating cash flow.
2. Read a credit rating rationale for its debt and note the agency's main concerns.
3. For a group company, list its main subsidiaries and where the debt sits.