Detailed Rationale

CRISIL Ratings' rating on the non convertible debentures and long term bank facilities of KKR India Financial Services Limited (KIFSL) continues on ‘Rating Watch with Negative Implications’; the rating on commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

On August 20, 2021, ratings on KIFSL was put on watch with Negative implications post the announcement of merger with Incred Financial Services Limited’s (Incred). The proposed reorganization is expected to come into effect by the first half of calendar year 2022 and, is subject to receipt of necessary approvals under applicable law, including approvals from the creditors, debenture holders, National Company Law Tribunal (NCLT), other relevant governmental/regulatory authorities and third parties.

 

CRISIL Ratings understands that a composite scheme of arrangement has been filed between KKR Capital Markets India Private Limited, KIFSL, Incred, Bee Finance Limited, and their respective shareholders with NCLT Mumbai on September 27, 2021. Further, a joint application has been made by Incred and KIFSL to RBI for prior approval of change in control and no objection on the NCLT application and, RBI’s response to the same is awaited.               

 

The resultant entity (post the reorganization subject to necessary approvals) is expected to use the brand name ‘InCred Financial Services Ltd’ (Incred) and will be spearheaded by the current leadership team of Incred. Incred’s existing investors are expected to hold over 65% stake in the resultant entity and KKR Singapore – as a strategic investor in the resultant entity – will hold the single largest stake of ~35%. KKR & Co Inc (KKR; rated ‘A/Stable’ by S&P Global Ratings [S&P]), the ultimate parent for KIFSL and other limited partners in KIFSL are expected to have shareholding in the resultant entity in the same proportion as their current shareholding in KIFSL. 

 

The Watch with negative implications factors that the merged entity would no longer have the shared brand name, shareholding of KKR consortium would reduce to around ~35% and there will not be full management control. Therefore, once the transaction is complete, the analytical approach would no longer factor in KKR as parent. CRISIL Ratings will instead reflect the above developments and evaluate the credit profile based on merged entity's business and financial risk profile.

 

CRISIL Ratings believes that there are many steps and developments, which may potentially need to be considered and approved by regulators before the transaction comes into effect. The rating watch will be resolved and final rating action will be taken once there is adequate progress on receipt of requisite approvals for the reorganization and other developments, if any, pertaining to the reorganization and the company itself are analyzed.

 

Till the transaction consummates, ratings continue to factor in the benefits that KIFSL derives from its strong linkages with, and high strategic importance to, its ultimate parent, KKR. The ratings also reflect KIFSL’s healthy capitalisation. These strengths are partially offset by vulnerability of its asset quality to risk inherent in wholesale financing (albeit that the company has written-off/ provided for bulk of its stressed accounts), the consequent impact on the earnings profile and risks linked to high concentration of exposures.

Analytical Approach

The ratings continue to centrally factor in the expectation of strong support to KIFSL from its ultimate parent, KKR till the consummation of the restructuring. This is because of the strategic importance of the entity to KKR, shared brand, strong operational linkages and complete management control. CRISIL also believes that the shared brand creates a strong moral obligation to provide timely financial support, in case of any exigencies.

 

If the proposed transaction were to go through the credit profile of the outstanding debt instruments of KIFSL, would be equivalent to that of the resultant entity. KKR is expected to ultimately hold around 15-20% stake in the resultant entity and the extent of support towards the resultant entity would need to be evaluated

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of strong support from the ultimate parent, KKR

Till the transaction is consummated, the rating continues to factor in expectation of strong support from KKR, owing to the strategic importance of the entity, complete management control over KIFSL, the strong operational linkages with KKR, and the shared brand name. KIFSL is KKR's credit investment vehicle in India and is aligned with the parent's global strategies for scaling up its credit business. KKR offers credit solutions across the globe, including in San Francisco, New York, Dublin, London, Sydney, Mumbai, and Singapore. In India, KKR has made a significant upfront investment to create a permanent vehicle for its structured credit business by investing USD 100 million during 2009 to 2011 (around Rs 470 crore[1]) as equity capital in KIFSL. Importantly, the equity has been infused directly from KKR's balance sheet, and not as KKR's contribution from funds managed by it. KKR also consolidates the financials of KIFSL with its own.

 

KKR held around 50.31% stake (as on September 30, 2021) in, and has complete management and board control over, KIFSL. The remaining stake is held by (a) a leading global limited partner (LP; or partner investor in KKR’s funds), which infused equity of USD 100 million (around Rs 5932 crore) in KIFSL in two tranches in August 2013 and June 2014 out of a large pool of committed funds; (b) Abu Dhabi Investment Authority (ADIA) which In November 2017, has infused around USD 100 million (Rs 640 crore2) to acquire indirect minority stake in KIFSL.

 

KIFSL’s operations are closely integrated with the parents and global operations. KKR has senior level representation on the various investment and risk committees of KIFSL and is actively involved in all key decisions taken by the company. KIFSL also benefits from the parent’s globally aligned compliance, finance, and risk management systems and processes. KIFSL derives synergistic benefits from KKR’s private equity business in India and leverages all existing client relationships. KIFSL is part of the common platform comprising KKR’s private equity, fund management, capital  market, and NBFC business in India, and derives synergies, especially in deal sourcing and client relationships.

 

CRISIL Ratings believes the shared brand also enhances the expectation of timely financial support from KKR, if needed. Any material disruption in KIFSL's business could have a significant impact on KKR's reputation and franchise. CRISIL believes receiving of all requisite approvals and more clarity on the proposed business plans of the combined entity post consummation of the transaction will be a key rating sensitivity factor.

 

* Healthy capitalisation metrics

Capitalisation metrics remain comfortable with gearing at 1.0 times as of September 30, 2021, compared to 1.2 times as of March 31, 2021 (2.4 times as on March 31, 2020). Pursuant to the losses amidst the recognition of the stressed accounts, the networth for KIFSL has reduced to Rs 989 crores as of September 30, 2021 against Rs 1074 crores as of March 31, 2021 (Rs2466 crore as on March 31, 2019). Nevertheless, the gearing metrics for the company continue to remain comfortable. This is in line with the company’s policy of maintaining low leverage. KIFSL’s overall capital adequacy ratio (CAR) was healthy at 56.43% as on September 30, 2021 (53.42% as on March 31, 2021). The comfortable capitalisation cushions the company against asset quality challenges inherent in the business.

 

Weakness:

* Vulnerability of asset quality to risks inherent in wholesale financing and concentration of exposures

Asset quality of the company remains vulnerable to risks inherent in wholesale financing. Given the inherent business nature, the concentration in the portfolio remained high with the top 10 borrowers constituting around 82% of the loan book as on September 30, 2021, bringing with it attendant risks. Over the last six months, the company has proactively written off/provided adequately for the stressed accounts which has eventually resulted in the loan book degrowing to Rs 1176 crores as of September 30, 2021 as compared to Rs 3355 crores as on March 31, 2020 (Rs 5694 crores as of March 31, 2019. The degrowth can be attributed to stress it witnessed due to unexpected events and challenges linked to fraud and governance and later due to COVID 19.

 

The stress resulted in inching up of the gross non-performing assets with the Gross NPA ratio at 11.96% as on September 30, 2021 compared to 12.14% as on June 30, 2021. The company had only one account in the GNPA bucket. Nevertheless, following the proactive provisioning and recognition of the stressed assets, the company started making additional provisioning. Pursuant to which the net NPA ratio stood at 3.85% as on September 30, 2021 (3.92% as on June 30, 2021). CRISIL Ratings expects the company to continue to proactively recognize any stressed assets before the merger becomes effective.

 

At a sectoral level, what has really supported the asset quality metrics of wholesale non-banks in the past, has been the ability of the entity to get timely repayments/exits via refinancing or event-linked fund inflows. However, the current challenging funding environment has significantly increased refinancing risks. Nevertheless, CRISIL Ratings notes that the company has demonstrated its strong ability to recover from stressed accounts, even during these times which is reflected in the collection efficiency it has seen in the last one year. Collection efficiency (after including prepayments which are inherent to this asset class) for the month of September 2021 stood at 143%. Additionally the company has recovered almost Rs 2555 crores since April 2020, which includes principal and interest receipt on assets. Amidst the current environment, ability to continue to get exits/prepayments, especially from stressed accounts and control slippages, will be a key monitorable.   

 

* Susceptibility of earnings profile to spike in credit costs

Since last 2 years, the asset quality metrics of the company has been deteriorating leading to elevated credit costs which has weighed on the earnings profile. Amidst the stress in the portfolio, the company has proactively, provided for and written of loans conservatively. In the last 2 years, the company has written-off around Rs 1,384 crore in addition to provisioning against potential stressed accounts.

 

Consequent, the earnings profile of the entity has been impacted since fiscal 2020, with the company reporting losses of Rs 1,256 crores in fiscal 2020. The recognition of stressed assets and conservative provisioning has continued till date with the company continuing to report losses of Rs 136 crores in fiscal 2021 and a half yearly loss of Rs 81 crore in the half year ended September 30 2021 (PBT loss at Rs 108 crore). Credit costs (Bad Debts/ ECL / Net (Gain)/Loss on Fair Value Changes) during the same period was at 34.70% for fiscal 2020 and 10.55% (annualized) for the half year ended September 30, 2021. Nevertheless, CRISIL Ratings notes that given the proactive provisioning and write-offs, there could be some recoveries for the company which could support the earnings profile going forward. Nevertheless, any incremental stress recognition and aggressive provisioning towards those accounts with the impending merger could continue to weigh on the earnings profile of the company.

 

[1] Exchange rate as on the relevant date of capital infusion.

Liquidity: Strong

Asset liability maturity (ALM) profile, as on September 30, 2021, had cumulative negative mismatches in the upto the 1 year bucket. However, liquidity profile of the company remains comfortable strengthened by high prepayments received during the year. As of November 7, 2021, the company had cash and cash equivalent at around Rs 496 crores against debt maturing of Rs 456.55 crores till Feb 2022

Rating Sensitivity Factors

Upward Factors

• Increase in benefits of ownership support from KKR
• Substantial improvement in asset quality and earnings profile of the company
• Capitalisation metrics continuing to remain comfortable with gearing remaining under 3 times on a steady state basis

 

Downward Factors

• Change in KIFSL's strategic importance to, or the company's linkages with KKR & Co Inc.
• Downward revision in S&P's rating on KKR & Co Inc
• Completion of transaction will result in change in analytical approach
• Deterioration in asset quality over an extended period, thereby also resulting in weakening of capitalisation metrics with gearing inching beyond 3 times
• Challenges in raising funds from diversified sources on regular basis and at optimal rates

About the Company

KIFSL, a non-deposit taking, systemically important, NBFC, engaged in providing structured funding, promoter financing, and mezzanine financing, commenced operations in October 2009. As on September 30, 2021, KKR Capital Markets India Private Limited held 100% stake in KIFSL.

 

KIFSL’s parent company, KKR Capital Markets India Private Ltd, a Securities and Exchange Board of India-registered merchant bank, is engaged in the fee-based business, including syndication for third parties and investment management.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs Crore)	Complexity Level	Rating outstanding with outlook
INE321N07053	Debenture	16-Jan-15	0%	16-Jan-22	60	Simple	CRISIL AA/Watch Negative
INE321N07202	Debenture	9-Dec-16	0%	9-Mar-22	65	Simple	CRISIL AA/Watch Negative
INE321N07210	Debenture	9-Dec-16	0%	9-Mar-23	65	Simple	CRISIL AA/Watch Negative
NA	Debenture*	NA	NA	NA	600	Simple	CRISIL AA/Watch Negative
NA	Debenture*	NA	NA	NA	300	Simple	CRISIL AA/Watch Negative
NA	Commercial Paper	NA	NA	7-365 days	500	Simple	CRISIL A1+
NA	Overdraft Facility#	NA	NA	NA	83.63	NA	CRISIL AA/Watch Negative
NA	Term loan -1	NA	NA	28-Dec-20	105	NA	CRISIL AA/Watch Negative
NA	Term loan -2	NA	NA	9-Jan-22	135	NA	CRISIL AA/Watch Negative
NA	Term loan -3	NA	NA	30-Nov-20	140	NA	CRISIL AA/Watch Negative
NA	Term loan -4	NA	NA	30-Mar-22	1120	NA	CRISIL AA/Watch Negative
NA	Term loan -5	NA	NA	20-Mar-24	200	NA	CRISIL AA/Watch Negative
NA	Term loan -6	NA	NA	25-Mar-24	200	NA	CRISIL AA/Watch Negative
NA	Cash Credit & Working Capital demand loan	NA	NA	NA	475	NA	CRISIL AA/Watch Negative
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	941.37	NA	CRISIL AA/Watch Negative

*Yet to be issued

#including sublimit for working capital term loan