Rating Rationale
October 01, 2019 | Mumbai
KKR India Financial Services Private Limited
Rating downgraded to 'CRISIL AA/Stable'
 
Rating Action
Total Bank Loan Facilities Rated Rs.3400 Crore
Long Term Rating CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
 
Rs.300 Crore Non Convertible Debentures CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.500 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.500 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.200 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.350 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.250 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.500 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.500 Crore Non Convertible Debentures  CRISIL AA/Stable (Downgraded from 'CRISIL AA+/Stable') 
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the long-term debt instruments and bank facilities of KKR India Financial Services Private Limited (KKR India Finance) to 'CRISIL AA/Stable' from 'CRISIL AA+/Stable'. The short-term rating on commercial paper has been reaffirmed at 'CRISIL A1+'. CRISIL has withdrawn its rating on non-convertible debentures of Rs. 220 crore as they have been fully repaid (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy.
 
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. Nevertheless, the ratings continue to factor in the 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]). 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.
 
KKR India Finance focuses on wholesale lending, including promoter financing and mezzanine and acquisition financing, and hence, has sizeable single-borrower exposure. Over the past three fiscals, the company managed to grow its loan book at a compound annual growth rate (CAGR) of 35% to reach Rs 5694 crores as on March 31, 2019, which stood at around Rs 5878 crores as on June 30, 20191. Given the inherent business nature, the concentration in the portfolio remained high with the top 20 borrowers constituting 52% of the loan book as on June 30, 2019.
 
Amidst this growth, KKR India Finance had managed its asset quality metrics with nil GNPAs between March 2016 and March 2018. 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. In fiscal 2019, the company witnessed slippages of 3 accounts, of which they managed to recover from two of the accounts, and had fully provided for the exposure towards the third. The reported GNPA remained at 2.0% as on June 30, 2019. While the reported GNPA metrics have been low so far, the potential stressed accounts in the portfolio has increased significantly in recent past, some of which are already in various overdue buckets. CRISIL notes that some of the recent stress in a few accounts manifested due to unexpected events and challenges linked to fraud and governance. Additionally, with over 60% of the portfolio still under moratorium (excluding early prepayments), some more accounts are susceptible to slippages going forward. The company is cognizant of the same and has initiated possible recovery steps for these accounts. The parent is also committed to ensure ongoing support to the company. Nevertheless, CRISIL notes that the company has demonstrated its strong ability to recover from stressed accounts, even during fiscal 2019. From January 2019 till August 2019, the company has managed to get repayments (including prepayments) aggregating around ~Rs 2000 crores, which is substantially higher than the scheduled collections. Amidst the current environment, ability to continue to get exits/prepayments, especially from stressed accounts, would remain a key monitorable. 
 
In the interim, KKR India Finance is expected to make provisions / write-offs for some of these accounts. This is expected to impact the earnings profile of the company in fiscal 2020. While the earnings profile is characterised by comfortable net interest margins given the high yields in its product suite of structured products and services, as well as by relatively low operating expenses, credit costs are expected to weigh on the overall profitability levels of the company in the current fiscal.
 
Further, since September 2018, the operating environment for non-banking financiers {non-banking financial companies (NBFCs) including housing finance companies (HFCs) has been challenging in terms of accessing funds, especially for those with a wholesale lending book. Interest from investors in the debt capital market for non-banks has reduced in the recent past, and a material turnaround is not expected in the near term. While, in this environment, the company has managed to raise ~Rs 1000 crores till August 2019 of traditional bank lines, the ability to raise incremental resources at regular periods and at optimal costs is a key monitorable.
 
Capitalisation metrics remain comfortable with networth at Rs 2510 crore and gearing of 1.6 times as on June 30, 2019 (Rs 2466 crore and 1.4 times, respectively, as on March 31, 2019). Capitalisation is supported by regular capital infusions by the parent and a large LP over the past five years. 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. KKR India Finance's Tier I and overall capital adequacy ratio (CAR) was healthy at 36.84% and 37.17% as on June 30, 2019 (37.95% and 38.29% as on March 31, 2019). The comfortable capitalisation cushions the company against asset quality challenges inherent in the business. Even after factoring in the potential impact of the elevated credit costs in fiscal 2020, CRISIL does not expect gearing to inch beyond 2.5 times, which would continue to remain comfortable.

Analytical Approach

The ratings continue to centrally factor in the expectation of strong support to KKR India Finance 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.

Key Rating Drivers & Detailed Description
Strengths:
* Expectation of strong support from the ultimate parent, KKR
The rating is underpinned by the expectation of strong support from KKR, owing to the strategic importance of the entity, complete management control over KKR India Finance, the strong operational linkages with KKR, and the shared brand name.
 
KKR India Finance 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 crore2) as equity capital in KKR India Finance. Importantly, the equity has been infused directly from KKR's balance sheet, and not as KKR's contribution from funds managed by it.
 
KKR held around 51% stake (as on June 30, 2019) in, and has complete management and board control over, KKR India Finance. 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 KKR India Finance 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 KKR India Finance. KKR consolidates the financials of KKR India Finance with its own. CRISIL believes that though KKR's stake in KKR India Finance may decline over the medium to long term, KKR will retain its management control over KKR India Finance and also continue to have a shared brand name.
 
Furthermore, KKR India Finance's operations are closely integrated with the parents and global operations. KKR has senior level representation on the various investment and risk committees of KKR India Finance, and is actively involved in all key decisions taken by the company. KKR India Finance also benefits from the parent's globally aligned compliance, finance, and risk management systems and processes. KKR India Finance derives synergistic benefits from KKR's private equity business in India and leverages all existing client relationships. KKR India Finance 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 believes the shared brand also enhances the expectation of timely financial support from KKR, if needed. Any material disruption in KKR India Finance's business could have a significant impact on KKR's reputation and franchise.

KKR India Finance will benefit from its high strategic importance to KKR and that KKR will take adequate measures to ensure that entity meets all its obligations on time. Any change in the management control by, or expectation of support from, KKR will remain a key rating sensitivity factor.
 
* Healthy capitalisation metrics
Capitalisation metrics remain comfortable with networth at Rs 2510 crore and gearing of 1.6 times as on June 30, 2019 (Rs 2466 crore and 1.4 times, respectively, as on March 31, 2019). Capitalisation is supported by regular capital infusions by the parent and a large LP over the past five years. 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. KKR India Finance's Tier I and overall capital adequacy ratio (CAR) was healthy at 36.84% and 37.17%, respectively, as on June 30, 2019 (37.95% and 38.29%, respectively, as on March 31, 2019). The comfortable capitalisation cushions the company against asset quality challenges inherent in the business. Even after factoring in the potential impact of the elevated credit costs in fiscal 2020, CRISIL does not expect gearing to inch beyond 2.5 times, which would continue to remain comfortable.
 
Weaknesses:
* Vulnerability of asset quality to risks inherent in wholesale financing
KKR India Finance had managed its asset quality metrics with nil gross non-performing assets (GNPAs) between March 2016 and March 2018. 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. In fiscal 2019, the company witnessed slippages of 3 accounts, of which they managed to recover from two of the accounts, and had fully provided for the exposure towards the third. The reported GNPA remained at 2.0% as on June 30, 2019. While the reported GNPA metrics has been low so far, the potential stressed accounts in the portfolio has increased significantly in recent past, some of which are already in various overdue buckets. CRISIL notes that some of the recent stress in a few accounts manifested due to unexpected events and challenges linked to fraud and governance. Additionally, with over 70% of the portfolio still under moratorium, some more accounts are susceptible to slippages going forward. The company is cognizant of the same and has initiated possible recovery steps for these accounts. The parent is also committed to ensure ongoing support to the company including in the recovery from the stressed assets as well as providing further equity in the event of distress.
 
Nevertheless, CRISIL notes that the company has demonstrated its strong ability to recover from stressed accounts, even during fiscal 2019. From January 2019 till August 2019, the company has managed to get repayments (including prepayments) aggregating around Rs 2000 crores, which is substantially higher than the scheduled collections. Amidst the current environment, ability to continue to get exits/prepayments, especially from stressed accounts, would remain a key monitorable. 
 
* Expected weakening in earnings profile
KKR India Finance is expected to make provisions / write-offs for some of these accounts. This is expected to impact the earnings profile of the company in fiscal 2020. While the earnings profile is characterised by comfortable net interest margins given the high yields in its product suite of structured products and services, as well as by relatively low operating expenses, credit costs are expected to weigh on the overall profitability levels of the company in the current fiscal.
 
* Moderate scale of operations
KKR's credit platform began operations in India around seven years ago and KKR India Finance had an outstanding loan book of around Rs 5878 crore as on June 30, 2019. Ability to scale-up operations, through economic cycles will be demonstrated only over the medium term.
 
Liquidity: Strong
Liquidity profile of the company remains adequate. Asset liability maturity profile for KKR India Finance is adequate with cumulative positive mismatches in upto the 1 year bucket as per the ALM profile as on June 30, 2019. The company has repayments of around Rs 1200 crores till March 2020 excluding renewals and 1500 crores including renewals of which around Rs 393 crore is due from November to January 2020 against which the company has cash and cash equivalents of ~Rs 500 crore and unutilised bank lines of ~Rs 210 crores as on date. From January 2019 till August 2019, the company has managed to get repayments (including prepayments) aggregating around Rs 2000 crores, which is substantially higher than the scheduled collections.
Outlook: Stable

CRISIL believes KKR India Finance will remain strategically important to KKR over the medium term, and continue to derive operational, management and financial support from the ultimate parent. KKR India Finance is likely to maintain a healthy capital position, which will partially offset the inherent asset quality challenges.
 
Rating sensitivity factors
Upward factors
* Substantial improvement in asset quality and earnings profile of company
* Capitalisation metrics continuing to remain comfortable with gearing remaining under 3 times on a steady state basis
 
Downward factors
* Material change in KKR India Finance's strategic importance to, or the company's linkages with KKR & Co Inc.
* Downward revision in S&P's rating on KKR & Co Inc
* 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

KKR India Finance, a non-deposit taking, systemically important, NBFC, engaged in providing structured funding, promoter financing, and mezzanine financing, commenced operations in October 2009. As on June 30, 2019, KKR Capital Markets India Ltd held 100% stake in KKR India Finance.
 
KKR India Finance's parent company, KKR Capital Markets India 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.

1 Note - Apr-Jun 19 nos. are without the impact of IndAs adjustments.
2 Exchange rate as on the relevant date of capital infusion

Key Financial Indicators
As on / for the March 31   2019 2018
Total Assets Rs crore 6487 6091
Total income Rs crore 861 741
PAT Rs crore 24 147
GNPA % 2.06 NIL
Gearing Times 1.4 1.2
Return on assets % 0.38 2.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon rate (%) Maturity date Issue size
(Rs crore)		 Rating outstanding 
with outlook
INE321N07038 Debenture 16-Jan-15 0% 16-Jan-20 60 CRISIL AA/Stable 
INE321N07046 Debenture 16-Jan-15 0% 16-Jan-21 60 CRISIL AA/Stable
INE321N07053 Debenture 16-Jan-15 0% 16-Jan-22 60 CRISIL AA/Stable
INE321N07095 Debenture 23-Apr-15 0% 23-Apr-21 70 CRISIL AA/Stable
INE321N07129 Debenture 4-Jan-16 0% 14-Mar-20 75 CRISIL AA/Stable
INE321N07137 Debenture 4-Jan-16 0% 14-Mar-21 75 CRISIL AA/Stable
INE321N07152 Debenture 29-Feb-16 0% 14-Apr-20 75 CRISIL AA/Stable
INE321N07160 Debenture 29-Feb-16 0% 14-Apr-21 75 CRISIL AA/Stable
INE321N07178 Debenture -10-Nov-16 0% 10-Nov-19 100 CRISIL AA/Stable
INE321N07186 Debenture -10-Nov-16 0% 4-Oct-20 100 CRISIL AA/Stable
INE321N07194 Debenture 9-Dec-16 0% 9-Jul-20 70 CRISIL AA/Stable
INE321N07202 Debenture 9-Dec-16 0% 9-Mar-22 65 CRISIL AA/Stable
INE321N07210 Debenture 9-Dec-16 0% 9-Mar-23 65 CRISIL AA/Stable
INE321N07228 Debenture 9-Feb-17 0% 9-Feb-20 300 CRISIL AA/Stable
INE321N07236 Debenture 10-Apr-17 0% 10-Apr-20 200 CRISIL AA/Stable
INE321N07244 Debenture 10-Apr-17 0% 10-Mar-21 200 CRISIL AA/Stable
NA Debenture* NA NA NA 600 CRISIL AA/Stable
NA Debenture* NA NA NA 300 CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 500 CRISIL A1+
NA Overdraft# NA NA NA 83.63 CRISIL AA/Stable
NA Term loan -1 NA NA 28-Dec-20 105 CRISIL AA/Stable
NA Term loan -2 NA NA 9-Jan-22 135 CRISIL AA/Stable
NA Term loan -3 NA NA 30-Nov-20 140 CRISIL AA/Stable
NA Term loan -4 NA NA 30-Mar-22 1120 CRISIL AA/Stable
NA Term loan -5 NA NA 20-Mar-24 200 CRISIL AA/Stable
NA Term loan -6 NA NA 25-Mar-24 200 CRISIL AA/Stable
NA Cash Credit & Working
Capital demand loan		 NA NA NA 475 CRISIL AA/Stable
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 941.37 CRISIL AA/Stable
*yet to be issued
#including sublimit for working capital term loan
 
Annexure - Details of Rating Withdrawn
ISIN Name of instrument Date of
allotment		 Coupon rate (%) Maturity date Issue size
(Rs crore)
INE321N07079 Debenture 23-Apr-15 0% 23-Apr-19 70
INE321N07111 Debenture 4-Jan-16 0% 14-Mar-19 75
INE321N07145 Debenture 29-Feb-16 0% 14-Apr-19 75
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+  29-03-19  CRISIL A1+  09-03-18  CRISIL A1+  24-11-17  CRISIL A1+    --  -- 
        26-02-19  CRISIL A1+               
Non Convertible Debentures  LT  2550.00
01-10-19  		CRISIL AA/Stable  29-03-19  CRISIL AA+/Stable  09-03-18  CRISIL AA+/Stable  24-11-17  CRISIL AA/Positive  15-12-16  CRISIL AA/Stable  CRISIL AA/Stable 
        26-02-19  CRISIL AA+/Stable      06-07-17  CRISIL AA/Positive  26-10-16  CRISIL AA/Stable   
                07-03-17  CRISIL AA/Stable  08-08-16  CRISIL AA/Stable   
Short Term Debt (Including Commercial Paper)  ST              06-07-17  CRISIL A1+  15-12-16  CRISIL A1+  -- 
                07-03-17  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  3400.00  CRISIL AA/Stable  29-03-19  CRISIL AA+/Stable  09-03-18  CRISIL AA+/Stable  24-11-17  CRISIL AA/Positive  15-12-16  CRISIL AA/Stable  CRISIL AA/Stable 
        26-02-19  CRISIL AA+/Stable      06-07-17  CRISIL AA/Positive  26-10-16  CRISIL AA/Stable   
                07-03-17  CRISIL AA/Stable  08-08-16  CRISIL AA/Stable   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit & Working Capital demand loan 475 CRISIL AA/Stable Cash Credit & Working Capital demand loan 475 CRISIL AA+/Stable
Overdraft# 83.63 CRISIL AA/Stable Overdraft# 83.63 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 941.37 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 941.37 CRISIL AA+/Stable
Term Loan 1900 CRISIL AA/Stable Term Loan 1900 CRISIL AA+/Stable
Total 3400 -- Total 3400 --
#including sublimit for working capital term loan
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Mapping global scale ratings onto CRISIL scale

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