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Auditor declines to offer opinion on Infrastructure India accounts

 

 

Auditor declines to offer opinion on Infrastructure India accounts – Infrastructure India has published results for the year ended 31 March 2017 – which are, of course, somewhat out of date now. They say that the Net Asset Value decreased to £282m as at 31 March 2017 and the NAV per share was 41p as at 31 March 2017, compared with 48p a year earlier. The shares are 4.25p.

A stronger Rupee, relative to the pound, and a lower 10-year bond rate (which is used to help calculate the net present value of their investments) should both have boosted the NAV but delayed completion schedules for Distribution Logistics Infrastructure (DLI), amongst other things, reduced the NAV overall.

They sold their stake in Western MP Infrastructure & Toll Roads Private Limited for £22.5m in cash. They say that their wind and small hydro operations continue to perform largely in-line with expectations, though they have cut assumptions on tariffs and overall production at their hydropower plants was lower than last year on lower water volumes.

The situation at their original Shree Maheshwar Hydel Power Corporation (SMH) project is still problematic. They say “At SMH, following the invocation of the pledge of the promoter’s shares and conversion of a portion of the sub-debt, the lenders now control the project. In June, the National Company Law Tribunal (“NCLT”) questioned the validity of Power Finance Corporation’s (“PFC”) invocation of a pledge of promoter shares. PFC has challenged the verdict. IIP is engaged in discussions with all interested parties.” which is hard to translate but the dam isn’t finished, the lenders have taken control of the company and there is £343.1m of debt in the project.

In addition, under contingent liabilities, the company says “In April 2016, Power Infrastructure India (PII) (a subsidiary owning the Company’s investment in SMHPCL) completed the transfer in its favour of the escrowed shares, pursuant to the share escrow and pledge agreements between PII and certain other Mauritius entities owned by the promoter. In the aggregate, PII owns, directly and indirectly, 35.4% of the shares of SMHPCL prior to the dilutive effects of the lender actions as discussed in the investment report. The escrowed shares are held in a Mauritius company with a third party debt of GBP11.6 million. PII disputes this loan on the basis that under the share escrow and pledge agreements, no valid, binding or enforceable loan arrangement are capable of coming into force in the Mauritius entity holding the escrow shares without the consent of PII. Therefore, Board disputes the loan in the Mauritius company and remains fully committed to resolving the misunderstanding with the parties concerned. The Directors do not consider it necessary to provide for the third party debt of GBP11.6 million in the financial statements.”

Infrastructure India is valuing SMH at £10m.

On DLI, their logistics investment, they say margins across the sector were challenging and DLI was not able to generate an operating profit during the fiscal year. Construction at all terminals slowed due to lack of funding (which we’ll come back to shortly) which has pushed back the completion schedules. They are developing facilities at Nagpur, Palwal (National Capital Region) and Anekal (Bangalore). They say the latter two are standing close to completion but are unable to commence material operations without further investment. However, DLI accounts for the bulk of the NAV. They say that the net present value of future cash flows due to Infrastructure India from DLI as at 31 March 2017 was £246.4m (down from £275.1m at the end of September 2016).

Cashflow problems

As at 31 March 2017, the IIP Group had cash available of £1.5m. They added another $4.5m to their $17m working capital loan facility from GGIC on 19 September 2017. The full $21.5m is repayable, together with the associated interest payment, on 31 December 2017. In addition, on 30 June 2017, they entered into an $8m unsecured bridging loan facility with Cedar Valley Financial, an affiliate of GGIC. This bridging loan matures on 31 December 2017 unless Cedar Valley Financial asks for it earlier. The company is in advanced and exclusive negotiations with a third party provider of finance in relation to a potential financing. The new funding would enable the company to repay both loans, provide additional working capital and construction capital to DLI and provide for the group’s general working capital needs.

As at 31 March 2017, the Company had pledged 51% of the shares in DLI, totalling 66,677,000 shares of INR 10 each, as part of the terms of a term loan within the underlying investment entity. In addition, the Company had provided a non-disposal undertaking of 51% of the shares in IEL, totalling 25,508,980 shares of 1 penny each, as part of the terms of a loan agreement within the underlying investment entity.”

GGIC used to be called Guggenheim Global Infrastructure Company Limited. It and its affiliates are the ‘ultimate controlling party’.

From the auditors:

The Company requires significant new funding to repay the US$21.5 million working capital loan facility provided by the majority shareholder, GGIC Ltd, in April 2013 (repayable on 31 December 2017) and the US$8.0 million bridging loan facility provided by Cedar Valley Financial in June 2017 (repayable at the earlier of being demanded and 31 December 2017) as well as funding the Group’s and Company’s general working capital needs. The Company is continuing its discussions with GGIC Ltd and other third party providers of finance. There is uncertainty as to whether this finance will be provided and on what terms.

The Company’s largest investment, Distribution Logistics Infrastructure Private Ltd (“DLI”) (valued by the Directors at GBP246.4m at 31 March 2017), requires the provision of significant additional working capital and construction finance. The provision of this additional finance is critical to DLI’s business model.

Further, if such additional finance is available, the terms of such finance may significantly affect the valuation of the Group’s interest in DLI. 

The valuation of the Group’s other portfolio companies may also be affected by the availability of working capital at Group level, as such entities may require additional funding and if this is not available their business plans may be adversely affected.  In particular, if additional funding is not provided, the Group may need to realise certain investments on a ‘quick-sale’ basis.

There is potential for the uncertainties to interact with one another such that we have not been able to obtain sufficient appropriate audit evidence regarding the possible effect of the uncertainties taken together. 

Disclaimer of opinion on financial statements

Because of the significance of the possible combined effect of the uncertainties described in the basis for disclaimer of opinion on financial statements paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.  Accordingly we do not express an opinion on the financial statements.”

IIP : Auditor declines to offer opinion on Infrastructure India accounts

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