Shadow Banks Owned By Edelweiss, KKR Latest To Face Ratings Downgrade

Rating company Crisil on Monday lowered by a notch the credit ratings of non-bank lenders owned by private equity firm KKR & Co. and financial services group Edelweiss, in the latest wave of downgrades to hit Indian shadow banking.

The downgrades, which follow a recent default by private equity-backed real estate lender Altico Capital India Ltd, show the liquidity crunch sparked by the defaults at Infrastructure Leasing and Financial Services (IL&FS) group a year ago has not spared even non-banking financial companies (NBFCs) owned by large PE firms, considered smart money managers.

On 12 September, Altico, owned by Varde Partners, Clearwater Capital and Abu Dhabi Investment Council, defaulted on an interest payment of ₹20 crore, leading to concerns that similar real estate and corporate lending-focused lenders could face liquidity pressures.

Crisil said it has downgraded the long-term debt instruments and bank facilities of KKR India Financial Services Pvt. Ltd to “CRISIL AA” from “CRISIL AA+”, and those of ECL Finance, part of Edelweiss group, to “CRISIL AA-” from “CRISIL AA”.

ECL Finance is backed by Canadian pension fund manager CDPQ.

KKR India Financial Services is majority owned by KKR, and has other investors such as the Abu Dhabi Investment Authority.

“The rating action is primarily on account of deterioration in the standalone credit profile marked by expected pressure on asset quality and its consequent impact on the earnings profile and capitalisation metrics,” Crisil said in its report on the KKR NBFC.

Going ahead, there may be new slippages at KKR India Financial Services, Crisil said. “Additionally, with over 70% of the portfolio still under moratorium, some more accounts are susceptible to slippages,” Crisil said.

The rating company, however, added that KKR India has initiated recovery steps for these accounts and its parent PE firm has committed to support the company, including providing further equity in case of distress.

Crisil’s rating action highlights the continued weak liquidity scenario at non-bank lenders and expectations of further slippages, at a time India’s central bank expects economic growth in the current fiscal to slow down to 6.1%. On Friday, the Reserve Bank of India cut its repo rate by an additional 25 basis points, its fifth consecutive cut this year, totaling a total reduction of 135 basis points—an effort to provide support to weakening economic growth.

Shares of Edelweiss Financial Services Ltd fell 7% on the BSE on Monday, following the downgrade of ECL Finance.

“The rating revision factors in the current challenging operating environment for non-banking financial companies, especially those with a wholesale lending book. Interest from debt investors in the sector has reduced in the recent past, leading to issues in funding access for non-banks, including the Edelweiss group,” Crisil said in a report.

The rating agency, however, noted that it drew comfort from the Edelweiss group’s ability to raise equity capital in the current market. Kora Management, a US-based investment firm, is investing around ₹525 crore in the group’s advisory business. Earlier, the group had entered into an agreement to raise ₹1,800 crore from CDPQ.

In June, Icra cut the rating on debt instruments of various Edelweiss group entities, such as Edelweiss Financial Services Ltd, the group holding company, Edelweiss Asset Reconstruction Co. Ltd, and Edelweiss Housing Finance Ltd.

Emails sent to KKR and Edelweiss remained unanswered.

The article was first reported on Livemint.com