ICRA Downgrades Piramal Capital, Edelweiss On Real Estate Exposure

ICRA Ltd. downgraded the debt instruments issued by Piramal Capital and Housing Finance Ltd. and Edelweiss Financial Services Ltd. due to their exposure to the real estate sector.

The outlook on the rating for both the non-bank lenders is now negative, the rating agency said in separate statements. While there's a concentration risk in the real estate and structured debt segments that Edelweiss Financial Services is exposed to, according to the rating agency, Piramal Capital has large-sized exposures to the real estate and infrastructure segment.

The rating action on the two relatively stronger non-bank lenders will only add to concerns about India's non-banking financial sector that has been facing a liquidity crunch following the defaults of IL&FS group last September. And it has had a ripple effect in the property market as developers are now finding it difficult to raise funds.

Piramal Capital & Housing Finance

• ICRA downgraded Piramal Capital and Housing Finance's Rs 6,545-crore non-convertible debentures from ‘AA+' to ‘AA' with a negative outlook.
• It lowered the rating on Rs 1,500 crore subordinated tier-II bonds, Rs 2,875-crore long-term fund-based limits and Rs 9,947 crore long-term term loans from ‘AA+' to ‘AA' with a negative outlook.
• It reaffirmed its ‘A1+' rating towards Rs 9,000 crore commercial paper programme.

Having funded projects of the top developers in the country, ICRA said the prolonged realty slump “makes the portfolio highly vulnerable to any borrower or industry-specific event, which could result in a steep deterioration in the asset quality indicators”.

As of March, 64 percent of the company's lending book was concentrated in construction finance at the land or pre-approval stage, the report said.

The rating firm, however, said the promoter group's expertise in the real estate segment and the company's risk management and monitoring processes will help ensure to proactively manage any potential credit risks or losses.

The company received prepayments worth Rs 8,602 crore in the last financial year, which provides comfort on the asset quality front, the rating agency said.

Piramal Capital and Housing Finance has stated its intent to reduce its top 10 group exposure from 32 percent as on March to 22 percent in the near term. The group raised over Rs 23,700 crore in long-term funds in the past nine months, and in June the group sold its 9.96 percent stake in Shriram Transport Finance Corporation for Rs 2,260 crore.

The group's strategy to build a sizeable retail lending business and diversify its operations while mobilising capital, remains crucial from a rating perspective, ICRA said.

The group has Rs 10,300-crore debt repayments in the first six months of the fiscal ending March 2020, while it expects collections worth Rs 5,200 crore during the period, ICRA said. The company has Rs 5,240 crore liquidity as of May, 2019.

Edelweiss Financial Services

• ICRA downgraded Edelweiss Financial Services Rs 466-crore non-convertible debenture programme to ‘AA-' with a negative outlook from ‘AA'.
• Its Rs 100-crore short-term NCDs have a rating of ‘A1+', and the Rs 6,350-crore commercial paper is rated ‘A1+'.
• ICRA withdrew credit ratings assigned to all three instruments on June 25 “at the request of the company”.

Edelweiss Group's wholesale lending book, comprising real estate and structured debt across sectors, is under stress and is largely untested. In the current environment, the non-bank lender's borrowers face tough financial conditions. Due to a slowdown in their core operations and leveraged capital structure, there are concerns over the exposure and possible credit losses.

“Although the group has demonstrated ability to maintain adequate reported asset quality, a prolonged slowdown in the real estate industry, coupled with the liquidity crunch in the overall market, could have an adverse impact on the same.”

The group focusses on large single borrowers in their asset reconstruction business but due to the complexity involved in resolving the debt and reviving the operations, Edelweiss Financial Services could be stuck in a protracted process, ICRA said.

Edelweiss recovered Rs 7,019 crore in FY19, up from Rs 2,574 crore in FY18.

In its response, Edelweiss Financial Services said the rating of A1+ for its commercial papers and AA- for its Rs 466 crore NCD indicate a high degree of safety regarding timely payment of financial obligations.

The company does not have any outstanding amount against the debt instruments rated by ICRA, and therefore the ratings have been withdrawn, it said in its filing.

In a separate media statement, Edelweiss said in April it raised $250 million from CDPQ, of which $150 million has been received. This not only reduced the company's debt-equity ratio to 3.9 but also improved the capital adequacy to 19.8 percent, it said. Also, Edelweiss is confident to be able to realise value from the collateral, if required.

Total borrowings, at the group level, stood at Rs 45,217 crore as of March 2019, down from Rs 48,031 crore a year earlier. The group has Rs 6,500 crore in debt obligations repayable between May 29 and Sept. 30, 2019, against expected inflows of Rs 3,600 crore, ICRA report said. The liquidity position stood at Rs 5,300 crore as of May.

ICRA said the group's endeavour to simplify the structure by reducing the number of subsidiaries and associates should help improve access to equity and debt.