CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the long term bank facilities and debt instruments of KKR India Financial Services Limited (KIFSL). CRISIL has withdrawn its rating on non-convertible debentures of Rs. 535 crore as they have been fully repaid (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy.
 
The ratings continue to factor in the benefits that KIFSL derives from its strong linkages with, and high strategic importance to, its ultimate parent, KKR & Co Inc (KKR; rated 'A/Stable' by S&P Global Ratings [S&P]). The ratings also reflect KKR India Financial Services Limited's healthy capitalisation and the current capital commitment of around US$150 million (~Rs 1120 crores at March 26, 2020 USD/INR closing rate) for KIFSL. 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 stressed accounts, the consequent impact on the earnings profile and risks linked to concentration of exposures.
 
On October 1, 2019, CRISIL had downgraded the ratings on long-term debt instruments and bank facilities of KIFSL to 'CRISIL AA/Stable' from 'CRISIL AA+/Stable'. The rating action was 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. Nevertheless, the ratings had then factored in the expectation of timely financial support, in case of any exigencies from parent, KKR.
 
On January 14, 2020, KKR announced that it has committed to invest US$150 million (~Rs 1120 crores) in KIFSL. KKR will fund its commitment to KIFSL through the firm's own balance sheet. While there are still some discussions between the instruments via which the capital will be infused in KIFSL, the same is expected to be via ordinary equity shares; preference shares with 0% coupon or differential voting rights equity shares. CRISIL expects the capital to be available on tap by KKR and to be drawn down, in tranches during the course of fiscal 2021, as and when required, to meet KIFSL's liquidity and future growth requirements, thereby providing adequate cushion against further slippages, if any. CRISIL believes that the capital infusion is a strong endorsement of KKR's support to the NBFC vehicle from a long-term perspective, despite the current challenges in their book.
 
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 4754 crores as of December 31, 2019 as compared to Rs 5694 crores as of March 31, 2019. Consequently, while the Gross NPA inched up to 6.0% as on December 31, 2019 compared to 2.1% as on March 31, 2019 the net NPA remained lower at 3.5%. CRISIL notes that some of the stress in a few accounts manifested due to unexpected events and challenges linked to fraud and governance. With the current lockdown in the country any impact on slippages and ability to recover from stressed accounts will remain a key monitorable.
 
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 notes that the company has demonstrated its strong ability to recover from stressed accounts, even during fiscal 2020. From January 2019 till December 2019, the company has managed to get repayments (including prepayments) of more than ~Rs 2000 crores, which is substantially higher than the scheduled collections. Just in December 2019- January 2020, the company managed to get prepayments to the tune of around Rs 500 crores. Amidst the current environment, ability to continue to get exits/prepayments, especially from stressed accounts, would remain a key monitorable.  
 
In the last six months, the company has accounted for write-offs of around Rs 1045 crore in addition to provisioning against potential stressed accounts. Amidst the provisioning and write offs the earnings profile was impacted with KIFSL reporting a nine months loss for fiscal 2020 (PBT loss at Rs.1516 crore). But despite the losses and the pressure on the earnings profile, capitalisation metrics remain comfortable with gearing at 2.3 times as of December 31, 2019, albeit higher than 1.4 times as of March 31, 2019. Consequent to the losses, the networth for KIFSL reduced to Rs 1480 crores as of December 31, 2019 against Rs 2466 crores as of March 31, 2019. The expected capital infusion of US$150 million is expected to provide adequate cushion against further slippages, if any. Further, 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. KIFSL's overall capital adequacy ratio (CAR) was healthy at 29.2% as on December 31, 2019 (38.29% as on March 31, 2019). The comfortable capitalisation cushions the company against asset quality challenges inherent in the business.
 
Asset liability maturity (ALM) profile, as on December 31, 2019, had with cumulative negative mismatches in the upto the 1 year bucket. However, the company has subsequently managed to raise/roll over ~Rs 1000 crores of traditional bank lines and also get prepayments. As on January 31, 2020, the company had repayments of around Rs 1597 crores till December 31, 2020, of which Rs 1182 crore was due till April 2020. The company has paid / arranged for all the debt due till March 31, 2020. For the payment due in March and April 2020, the company has adequate cash and equivalents over Rs 700 crore as on date. In addition, the company is still managing to get exits in some of the accounts which support the liquidity position of the company. On the outflow side, the company is undertaking committed disbursements and continues to explore the market for good opportunities and deals. The company's ability to raise incremental resources at regular periods and at optimal costs is a key monitorable.

The ratings continue to centrally factor in the expectation of strong support to KIFSL from its ultimate parent, KKR & Co Inc (KKR; rated 'A/Stable' 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, in case of any exigencies.

Asset liability maturity (ALM) profile, as on December 31, 2019, had with cumulative negative mismatches in the upto the 1 year bucket. However, during January 2020-March 2020 the company has subsequently managed to raise/roll over ~Rs 375 crores of traditional bank lines and also get prepayments and is in talks for additional bank lines.
 
As on January 31, 2020, the company had repayments of around Rs 1597 crores till December 31, 2020, of which Rs 1182 crore was due till April 2020. The company has paid / arranged for all the debt due till March 31, 2020. For the payments due in March and April 2020, the company has adequate cash and equivalents of over Rs 700 crore as on date. In addition, the company is still managing to get exits in some of the accounts which support the liquidity position of the company. On the outflow side, the company is undertaking committed disbursements and continues to explore the market for good opportunities and deals.

CRISIL believes KIFSL will remain strategically important to KKR over the medium term, and continue to derive operational, management and financial support from the ultimate parent. KIFSL is likely to maintain a healthy capital position, which will partially offset the inherent asset quality challenges.

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 December 31, 2019, 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.


¹Exchange rate as on the relevant date of capital infusion

Any other information: Not applicable