ICRA Downgrades Two Edelweiss Group Firms Citing Increased Stress

Rating agency ICRA Ltd has downgraded the credit rating of Edelweiss Finance & Investments Ltd and Edelweiss Housing Finance Ltd on account of increased stress within the group.

On May 5, ICRA Ratings downgraded the credit rating on EFIL's bank lines, debentures and subordinated debt, amounting to Rs 2,735 crore by one notch. The rating agency also downgraded the credit ratings on EHFL's borrowings, amounting to Rs 6,760 crore, by a notch.

ICRA downgraded EFILs' long-term debt to A+ from AA-. EHFL's long term debt rating has also been down to A+ from AA-.

In both rating releases, ICRA said that it has taken a consolidated view of the Edelweiss Group, given the close linkages between the group entities, common promoters and senior management team, shared brand name, and strong financial and operational synergies.

On April 20, Edelweiss Financial Services filed a writ petition in the Bombay High Court seeking to restrain ICRA from downgrading its debt.

On April 30, CARE Ratings re-affirmed the credit rating for another group company, Edelweiss Financial Services Ltd. The rating agency had revised its outlook on EFSL's Rs 284 crore non convertible debentures which are rated ‘AA-', to negative, while keeping the A1+ credit rating for the company's Rs 6,350 crore commercial paper unchanged.

While the Edelweiss Group has a diversified revenue stream from credit products, investment banking, equity broking, wealth management among others, its loan book remains vulnerable to credit risks, ICRA said.

“The ongoing stress and funding challenges in the underlying borrower segments (real estate and structured debt), coupled with the gradual seasoning of the book with the completion of the scheduled moratorium period have resulted in an increase in slippages,” said ICRA, adding that there has also been a deterioration in the asset quality of its retail portfolio.

The whosesale lending book also witnessed a decline in average security cover to 1.56x in December 2019 from 1.8x back in March 2019. Around 49 percent of the group's loan book is exposed to wholesale lending, it added.

Further, non-performing assets as a proportion of total loan assets of the group increased to 2.76 percent in December 2019 from 1.87 percent as of March 2019, ICRA said. “Given the resultant rise in credit costs, the profitability level is expected to remain subdued over the near term.”

The rating agency acknowledged that the group's near term liquidity position is comfortable.

As of April 16, the group's on-balance sheet liquidity stood at Rs 3,400 crore. It has undrawn bank lines worth Rs 600 crore.“It also has other assets in the form of short-term treasury assets amounting to Rs 400 crore and short-term loan book of Rs 3,500 crore as of April 16, 2020, that can be liquidated at a relatively short notice,” said ICRA.

In total, the Edelweiss Group has Rs 3,865 crore worth of upcoming debt repayment obligations and operating expenses worth Rs 360 crore until the end of June 2020, it said.

However, funding challenges may emerge over the medium term, given the operating environment and the risk-averse sentiment of investors towards non-banks, particularly wholesale-oriented entities, the rating agency said.

While the group has been raising less funds from debt markets compared to the period before September 2018, yields on its debt securities in the secondary market have been elevated. Therefore, its “ability to mobilise resources at adequate rates is expected to remain constrained over the near to medium term,” said ICRA.

The group's consolidated borrowings stood at Rs 39,364 crore as of December 2019.