The rating downgrade at global private equity fund KKR’s non-banking financial company (NBFC) KKR India Financial Services Pvt. Ltd has revealed cracks in the storied company’s local credit strategy, which had come to be its mainstay in the country.
KKR was one of the first global private equity firms to set up lending operations in India, as early as 2009, offering credit solutions such as promoter financing, mezzanine debt, acquisition financing, etc. In fact, KKR’s focus on lending became so strong over the years that traditional private equity investing took the back-seat at its India unit. The PE firm’s lending foray was led by its India head Sanjay Nayar, who was previously heading Citibank’s India business.
KKR runs its credit operations through two NBFCs, KKR India Financial Services, which lends to corporates; and KKR India Asset Finance, which focuses on real estate lending. It also manages domestic credit funds and invests in credit deals through its global funds.
On Friday, rating agency Crisil said it has downgraded the long-term debt instruments and bank facilities of KKR India Financial Services to “CRISIL AA" from “CRISIL AA+".
“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.
The rating action highlights the pressure on KKR’s lending book arising from a growth slowdown and liquidity crunch in the credit market, which have reduced the refinancing ability of companies and promoters.
Several companies that KKR has lent to have been in the media in recent weeks for governance lapses, while a few others have been admitted for bankruptcy resolution.
KKR’s loans that have turned sour in recent times include Kwality Dairy, which recently sought a second extension from the courts for its insolvency resolution process; CG Power and Industrial Solutions, where the board has found “suspect" transactions which led to under-reporting of the company’s liabilities; and Coffee Day Enterprises Ltd, which is trying to reduce group debt by selling non-core assets following the demise of its promoter V.G. Siddhartha.
Last year, Sintex-BAPL Ltd, a subsidiary of the Sintex group, raised ₹1,250 crore from KKR. The group’s textile business recently defaulted on various debt repayments, forcing Sintex to sell its European business in an attempt to make good its debt obligations to lenders, including KKR.
Flexituff Ventures International Ltd, which raised ₹150 crore from KKR in 2016, is another stressed account. On 29 August, rating firm Icra downgraded the firm’s rating to D, following delays in honouring domestic debt payments as well as repayment of FCCBs.
Gross non-performing assets of KKR India Financial Services stood at 2% as on 30 June.
In its report, Crisil noted that while the reported gross non-performing metrics have been low so far, the number of potential stressed accounts in the portfolio has increased significantly in the recent past. “Additionally, with over 60% of the portfolio still under moratorium (excluding early prepayments), some more accounts are susceptible to slippages going forward," the rating agency noted.
To be sure, KKR is not the only private equity investor that is seeing pain in its credit operations. Real estate lender Altico Capital India Ltd last month defaulted on an interest payment of ₹20 crore. Other corporate-backed NBFCs active in corporate lending such as those operated by Piramal Enterprises and Edelweiss Group, too, have seen rating cuts in the recent months.