Rashesh Shah, chairman and chief executive officer of the Edelweiss Group. (Photo: BloombergQuint)

Canadian Fund CDPQ To Infuse Rs 1,800 Crore In Edelweiss’ NBFC Arm

Canadian pension fund CPDQ will infuse Rs 1,800 crore ($250 million) into the Edelweiss Group’s subsidiary ECL Finance Ltd. even as weaker non-bank lenders continue to face a credit crunch triggered by the IL&FS crisis.

The money will come in three tranches—$150 million on deal closure, $50 million at the end of year one and $50 million at the end of year two—and will be converted into equity in 24 to 60 months, according to a statement by Edelweiss. In return, CDPQ will have standard governance rights and two board seats in ECL Finance. Details on the timing, valuation and stake are awaited.

As part of the transaction, Edelweiss Housing Finance Ltd. will become a subsidiary of ECL Finance and Edelweiss Retail Finance Ltd. will be merged with ECL Finance. With this partnership, the company aims to build a strong credit portfolio, with an increasing focus on the retail segment. CDPQ already owns a 20 percent stake in Edelweiss Asset Reconstruction Company Ltd., 1.5 percent in the listed holding company and investments in Edelweiss group’s alternative investment funds.

“I expect this partnership to deliver tremendous value towards deepening the market and we are encouraged by this investment by CDPQ,” Rashesh Shah, chief executive officer of Edelweiss Group, said in the statement.

Edelweiss group has a credit business of Rs 30,000 crore, with retail contributing 44 percent and wholesale the rest. The fund infusion CDPQ will help it further build a large and diversified credit platform driven by small business and affordable housing loans, it said.

Citi said in a note while the fundraise is positive, it’s not necessarily for near-term liquidity as approvals and deal consummation may take time. While details of the transaction are awaited, the deal can give support at a time when non-bank lenders have gone slow on real-estate lending. The sector contributes about 25 percent to the loan portfolio of Edelweiss Group, according to Citi.

Morgan Stanley said the infusion will strengthen the balance sheet of the company. The stock trades at 1.6 times one-year forward price-to-book ratio and below its five-year average of 2 times. Morgan Stanley has an ‘Overweight’ rating on the stock.

ECL Finance is expected to benefit from fundraise in multiple ways. They are:

  • Getting growth capital for the next three-four years. The company said it will use the capital to grow business for technology and digital investments and widen distribution to tier-2 and tier-3 cities.
  • Adequate capital to help it take advantage of expected consolidation in the industry. Edelweiss Group’s tier-I capital was 14.8 percent of its risk weighted assets. The proposed equity infusion is about 300 basis points of these assets, according to BloombergQuint’s calculations.
  • Gives it the opportunity to grow through acquisitions, apart from organic growth.
  • Improve the company’s debt to equity ratio—which, according to Citi, is currently 5:1—and improve its ability to raise debt from the market.
  • The company, which has an exposure of about 25 percent to the real estate sector, could meet its provisioning requirement norms and other regulations amid concerns over lending to the sector.

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