CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities and debt instruments of KKR India Asset Finance Limited (KIAFL).

The ratings are unaffected by the recent rating action by S&P Global Ratings (S&P) on parent, KKR & Co (KKR). On July 8, 2020, S&P placed its 'A' rating on KKR on 'CreditWatch with Negative implications. The rating action follows the proposed acquisition by KKR of Global Atlantic Financial Group Limited (Global Atlantic) and the uncertainty about the funding sources that KKR will use to acquire Global Atlantic and the potential for leverage to increase. The transaction is pending approvals and is expected to close in early 2021. As per S&P's rationale, the CreditWatch Negative indicates that S&P could lower the ratings on KKR upon the close of the transaction if the funding sources the company selects to close the deal leads to leverage above 1.75x. That said, S&P does not anticipate more than a potential single-notch downgrade, even if the transaction incorporates a meaningful component of debt. CreditWatch is expected to be resolved once the acquisition is closed or in the event that the transaction is called off.

As per CRISIL's rating criteria, CRISIL centrally factors in the strategic importance and expectation of strong support to KIAFL from its ultimate parent, KKR (rated 'A/ Watch Negative' by S&P) by notching up the rating based on parent support. CRISIL also maps the global scale ratings by S&P on KKR onto its own rating scale in order to assess the parent's credit profile. The current rating action by S&P on KKR does not impact the outstanding ratings on KIAFL as per our rating criteria.  

The ratings continue to factor in the strong linkages with, and high strategic importance to, its ultimate parent, KKR & Co Inc (KKR; rated 'A/Watch Negative' by S&P Global Ratings [S&P]). CRISIL also believes that the shared brand with complete management control creates a strong moral obligation to provide timely financial support, in case of any exigencies. The ratings also factor in the comfortable capitalisation metrics marked by low leverage. However, with a significant proportion of the book under moratorium, asset quality pressures could manifest as the book seasons which remains a key monitorable.
 
KIAFL focuses on real estate lending and over the past three fiscals, the company has managed to grow its loan book to reach Rs 3971 crores as on March 31, 2020, compared to around Rs 3735 crores as on March 31, 2019 (Rs 2303 crore as on March 31,2018). However, the concentration in the portfolio remained high with the top 10 borrower groups constituting around 68% of the loan book as on March 31, 2020.
 
Further capitalisation metrics continue to remain comfortable with networth at Rs 2081 crore and gearing of 1.0 times as on March 31, 2020 (Rs 2034 crore and 0.97 times, respectively, as on March 31, 2019). The company has a conservative leverage philosophy, with gearing likely to remain below 3 times over the medium term. This is in line with the company's policy of maintaining low leverage. KIAFL's Tier I and overall capital adequacy ratio (CAR) was healthy at 46.17% and 46.78% as on March 31, 2020 (44.84% and 45.16% as on March 31, 2019). The comfortable capitalisation cushions the company against asset quality challenges inherent in the business.
 
However, the nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements, collections and asset quality. The lockdown is now further extended in containment zones with re-opening of the prohibited activities in a phased manner in areas outside containment zones. Herein, CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner.
 
While the reported GNPA metrics have been Nil (even as on March 31, 2020), in fiscal 2020, one of the accounts that went into overdue status was sold to the co-lender. Further, at a sectoral level, what has supported the asset quality metrics of wholesale NBFCs 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. CRISIL notes that the company has demonstrated its ability to recover from accounts and monetize assets. During fiscal 2020, the company has managed to get collections (including prepayments) aggregating more than 2.5 times the scheduled collections. However, regular collections during the last three months (April to June 2020) have been impacted amidst the Covid-19 linked lockdown and impact on real estate sector. Therefore, any delay in return to normalcy could put pressure on collections and asset quality metrics and will be a key monitorable. The Company continues to meet all its debts obligation and has timely repaid Rs 211.25 crores during the last three months (April to June 20). Though no moratorium has been received from its lenders, the Company has extended moratorium to its customers. As per original contracted tenure, the company has significant majority of portfolio still under moratorium (excluding early prepayments).With respect to Covid-19, around 47% of the book has been given moratorium by KIAFL.
 
 While the Reserve Bank of India (RBI) announced regulatory measures under the Covid-19 Regulatory Package, whereby lenders were permitted to grant moratorium (originally till May 31, 2020) on bank loans which is now further extended till August 31, 2020. KIAFL has not obtained any moratorium from its lenders.
 
On the funding side, the company has managed to raise Rs 550 crores in fiscal 2020 through traditional bank lines. In terms of liquidity, it remains adequate. As on June 30, 2020, the company had total debt repayments (with interest) of Rs 182 crore till September 2020. Against this, they had cash and equivalents of Rs 121 crore and undrawn bank lines of Rs 300 crore. KIAFL's ability to raise incremental resources regularly at optimal costs and maintain its liquidity buffer remains a key monitorable.

The ratings centrally factor in the strategic importance of KIAFL to KKR & Co Inc (KKR; rated 'A/Watch Negative' by S&P Global Ratings [S&P]). 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, both on an ongoing basis and in the event of distress.

Strengths:
* Expectation of strong support from KKR
The ratings are underpinned by the expectation of strong support from KKR, despite the relatively low shareholding of 9.7% in KIAFL as on March 31, 2020. This is due to the strategic importance of the real estate credit business in India, complete management control over KIAFL, the strong operational linkages with KKR, and the shared brand name.
 
KIAFL is KKR's real estate credit vehicle in India and is aligned with the parent's global strategies for scaling up the real estate business globally and in Asia. KKR offers real estate solutions across the globe. Real estate investment is a key focus area for KKR, with a dedicated team formed in 2011. The global real estate business has scaled up. India, as a market, is unique in the KKR ecosystem in terms of use of a permanent non-banking financial company (NBFC) model for the credit business, as well as in terms of the breadth of product offerings.
 
While KKR holds only 9.7% in KIAFL, it has complete management and board control over the latter. Importantly, KKR's equity contribution of USD 23.23 million (Rs 165.9¹] crore) in KIAFL has been infused directly from KKR's balance sheet, and not from funds managed by it. The remaining equity stake is held by leading global limited partners (LPs; or partner-investors in KKR's funds), and an Indian high-networth individual, who have collectively infused equity of USD 221.87 million (around Rs 1584.61 crore) in KIAFL. CRISIL believes KKR will retain its management control over KIAFL.
 
KIAFL's operations are closely integrated with KKR's Indian and global operations. KKR has senior level representation on the investment and portfolio management committees of the subsidiary, and is actively involved in all key decisions. KIAFL also benefits from the parent's global compliance, finance, and risk management systems and processes, and derives synergistic benefits from KKR's private equity and NBFC business in India and leverages all existing client relationships. KIAFL is part of the common platform comprising KKR's private equity, fund management, capital market, and NBFC businesses in India, and derives synergies, especially in deal sourcing and client relationships.
 
CRISIL believes the shared brand implies a strong moral obligation on KKR to support KIAFL. Any material disruption in KIAFL's business could have a significant impact on KKR's reputation and franchise, and could potentially impede the parent's ability to raise funds from external investors for its managed funds globally.
 
CRISIL believes KIAFL will benefit from its high strategic importance to KKR and that the parent will take adequate measures to ensure that KIAFL meets all its obligations on time. Any change in the management control by, or expectation of support from, KKR is a key rating sensitivity factor for KIAFL.
 
* Comfortable capitalisation
Capitalisation metrics continue to remain comfortable with networth at Rs 2081 crore and gearing of 1.0 times as on March 31, 2020 (Rs 2034 crore and 0.97 times, respectively, as on March 31, 2019). The company has a conservative leverage philosophy, with gearing likely to remain below 3 times over the medium term. This is in line with the company's policy of maintaining low leverage. KIAFL's Tier I and overall capital adequacy ratio (CAR) was healthy at 46.17% and 46.78% as on March 31, 2020 (44.84% and 45.16% as on March 31, 2019). The comfortable capitalisation cushions the company against asset quality challenges inherent in the business.
 
Weaknesses:
* Vulnerable asset quality and impact on profitability
KIAFL focuses on real estate credit, resulting in high industry concentration and sizeable single-borrower exposures. Asset quality will remain vulnerable to these factors, despite sound risk management systems and processes to help structure and manage these exposures. KIAFL focuses primarily on major metro cities and does not typically finance land acquisition. Financing agreements are generally entered into once material regulatory approvals are in place. The focus is primarily on mid-market residential projects, with selective commercial project lending. Given the nature of business, the top 10 borrower group exposures account for around 68% of the outstanding portfolio as of March 2020, leading to concentration risks in the portfolio.
 
While the reported GNPA metrics have been Nil (even as on March 31, 2020), in fiscal 2020, one of the accounts that went into overdue status was sold to the co-lender. Further, at a sectoral level, what has supported the asset quality metrics of wholesale NBFCs 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. CRISIL notes that the company has demonstrated its ability to recover from accounts and monetize assets. During fiscal 2020, the company has managed to get collections (including prepayments) aggregating more than 2.5 times the scheduled collections. However, regular collections during the last three months (April to June 2020) have been impacted amidst the Covid-19 linked lockdown and impact on real estate sector. Therefore, any delay in return to normalcy could put pressure on collections and asset quality metrics and will be a key monitorable. The Company continues to meet all its debts obligation and has timely repaid Rs 211.25 crores during the last three months (April to June 20). Though no moratorium has been received from its lenders, the Company has extended moratorium to its customers. As per original contracted tenure, the company has significant majority of portfolio still under moratorium (excluding early prepayments).With respect to Covid-19, around 47% of the book has been given moratorium by KIAFL.
 
Incremental and conservative provisioning and loss towards accounts including against SR for one account sold to ARC was around Rs 95 crore, which impacted profitability with RoA of 1.2% for fiscal 2020 compared to 5.2% for fiscal 2019. Loss/Provision on account of assets sold as a percentage of advances stood at 2.4% for the company. Earnings remain sensitive to slippages in the portfolio and will be a key monitorable.
 
* Modest scale of operations
KIAFL's scale of operations remains modest. KKR's credit platform began operations in India in 2016. KIAFL had an outstanding loan book of around Rs 3971 crore as on March 31, 2020, compared to Rs 3735 crore as on March 31, 2019. Ability to scale up operations while managing high business risks over economic cycles will be demonstrated only over the medium term.

Liquidity profile of the company remains adequate. Asset liability mismatch profile for KKR India Asset Finance is adequate with cumulative positive mismatches in upto the 1 year bucket as per the ALM profile as on March 31, 2020. As on June 30, 2020, the company had total debt repayments (with interest) of Rs 182 crore till September 2020 against this, they had cash and cash equivalent of Rs 121 crore and unutilized bank lines of Rs 300 crore. Collection for the company in the last three months (April ' June) of fiscal 2020 stood at Rs 216.32 crore.

CRISIL believes KIAFL will remain strategically important to KKR over the medium term, with the parent maintaining complete management control. KIAFL will continue to derive operational, management and financial support from KKR. The company is likely to maintain comfortable capitalisation, which will partially offset the inherent asset quality challenges.
 
Rating Sensitivity Factors
Upward Factors
* Sustained asset quality metrics with no inch up of stressed assets translating into comfortable earnings profile.
* Capitalisation metrics continuing to remain comfortable with gearing remaining under 3 times on a steady state basis.
 
Downward Factors
* Downward revision in S&P's rating on KKR & Co Inc.
* Material change in KIAFL's strategic importance to, or the company's linkages with KKR & Co Inc.
* Deterioration in asset quality with GNPA (after adding write-offs).
* Challenges in raising funds from diversified sources on regular basis and at optimal rates.

KIAFL is a non-deposit taking, systemically important NBFC. It provides real estate credit financing. As on March 31, 2020, KKR held 9.7% stake while the other shareholders held 90.3% stake in KIAFL. KKR holds complete operational/managerial control over the entity.
 
For fiscal 2020, KIAFL had profit after tax (PAT) of ~Rs 48 crore and total income of Rs 493 crore, against a profit of Rs 164 crore and total income of Rs 446 crore for fiscal 2019.

¹Exchange rate: 1 USD=71.42 INR.

Any other information: Not applicable