MUMBAI: US buyout group Kohlberg Kravis Roberts (KKR) is making a fresh equity commitment of $150 million, backing its wholesale non-banking credit arm KKR India Financial Services (KIFSL) that has been buffeted by rising bad loans in its portfolio, ratings downgrade, personnel changes, strategy overhaul and repayment pressures.
This is the second time the parent is infusing ‘confidence’ capital after putting in $100 million in 2009, when the PE group launched its credit business in India in what was then hailed as a pioneering strategy. Till date its other investors Abu Dhabi Investment Authority (ADIA) and Texas Teacher Retirement System have each infused $100 million.
KKR will fund its commitment to KIFSL through the firm’s balance sheet. “This is a demonstration of the confidence KKR has in the franchise and in its India business,” said Sanjay Nayar, CEO, KKR India. “The fund infusion will help consolidate our balance sheet as well as grow the book. The demand for alternative credit in India is still very high.”
In the last decade, KKR’s loan book has grown to nearly $6 billion, making it one of the largest corporate-focused shadow banks in the country. But with several of its bets going awry, the firm has been under severe scrutiny.
NCD Repayments Due in 2020
Nayar admitted that KIFSL will also modify its risk and underwriting standards going forward and some overhaul is expected on dealings with related-party transactions and a coherent strategy to coexist with other lenders.
“We took the medicine early but we don’t have a definitive answer on how the strategy will evolve because the ecosystem itself is evolving. But we have learned lessons which we take with us as we look to the future,” he added.
The capital infusion also comes at an opportune time since Rs 1,200 crore of NCD repayments are due in 2020, a bulk of which are coming up between February and April.
KKR is understood to be seeking a $200 million relationship loan to repay the upcoming commitments and bolster the balance sheet. Sources in the know said that mutual funds have also written to KKR founder Henry Kravis expressing their concern over the India business. KKR declined that such a letter was sent.
“All maturities on its due date will be absolutely met, there is no question about it,” said Nayar. “This narrative only goes up because the market is nervous after the highprofile wind-downs of other nonbank lending names in the market. MFs at this time are considering how they will invest their own money in this environment. No letter has been sent to the most senior members of our firm on this.”
The bondholders include DSP Mutual Fund, Franklin Templeton, HDFC Mutual Fund, ICICI Prudential Mutual Fund, Nippon India Mutual Fund, SBI Mutual Fund and UTI Mutual Fund.
“KKR is one of the most prestigious private equity firms in the world and I do not think that there would be any problem in repayment of the dues owed to any lender,” said Hemendra Kothari, chairman, DSP Investment Managers. “The India venture is 51% owned by KKR Global and that is why investors had bet their money on this venture.”
Sources in the know also suggested that an RBI audit in December had verified the health of the business.
KKR’s NBFC has faced flak for backing companies as diverse as Café Coffee Day, CG Power, Kwality Dairy, Sintex, GMR, JBF Industries, Amtek Auto, Resonance Eduventures and Flexituff, among others. Close to a third of its portfolio has been under stress while as much as half of the 30-odd deals it has pursued in the last few years is estimated to have soured which led to a downgrade by Crisil last October.
“In fiscal 2019, the company witnessed slippages of three accounts, of which they managed to recover from two, and had fully provided for the exposure towards the third. The reported GNPA (gross non-performing assets) remained at 2.0% as on June 30, 2019,” Crisil analyst Krishnan Sitaraman wrote last October. “While the reported GNPA metrics have been low so far, the potential stressed accounts in the portfolio has increased significantly in the 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.”
KIFSL provides Indian businesses with financing solutions such as loans against shares, last-mile financing, M&A funding etc. 80% of its exposure are on its books while the rest are syndicated down to other lenders and its alternative investment funds.