Edelweiss Moves Bombay High Court To Prevent Rating Downgrade By ICRA

Edelweiss Financial Services filed a writ petition in the Bombay High Court seeking to restrain ICRA Ltd. from downgrading its debt, according to three people in the know.

The rating agency is looking to downgrade the financial services provider by a notch to A-plus, the people told BloombergQuint on the condition of anonymity. As of June 2019, ICRA had an AA-minus rating—high degree of safety regarding timely servicing of financial obligations and carry a very low credit risk—on Edelweiss.

To arrive at the rating, ICRA had considered the financials of the consolidated entity that includes more than 65 subsidiaries and associates. “ICRA 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,” it had said in the June 2019 note. The annual review is yet to be released and is being challenged in the court.

According to a fourth person aware of the matter, the rationale for the ratings downgrade was based on ICRA’s apprehension about the impact of Covid-19 even as the financial services firm hasn’t shared the complete information due to the lockdown. Edelweiss has sought an additional two-three weeks to furnish information, including a financial picture based on the relaxation and relief provided by the government and the market regulator, the person said on the condition of anonymity as the matter is sub-judice.

The petition comes as the Securities and Exchange Board of India in March relaxed norms to recognise defaults by the credit rating agencies after the Reserve Bank of India provided moratorium on loans. SEBI also allowed rating agencies a 30-day relaxation to put up annual and semi-annual ratings actions, given difficulties in getting information from the issuers and third parties. The credit rating agencies, however, should endeavour to finish the exercise on a best effort basis, it had said.

Edelweiss declined to comment on BloombergQuint’s queries since the matter is sub-judice, while ICRA has yet to respond.

A rating downgrade may have a significant impact at this time on access to capital for the Edelweiss group. Such a move usually leads to accelerated payments and raise the cost of borrowings from banks. That makes it difficult for the instruments of the company to participate in the targeted long-term repo operations announced by the Reserve Bank of India. Currently, banks are largely participating in AAA and AA category instruments of non-bank lenders.

Edelweiss’ total debt stood at Rs 36,848 crore as of December 2019. The capital adequacy stood at 21.4 percent and liquidity at Rs 10,300 crore. The company has 58 percent of debt in form of non-convertible debentures, 41 percent in form of bank loans and 1 percent in form of commercial papers at the end of December 2019.

Of the total debt, 43 percent is held by banks, 27 percent by retail, 10 percent by mutual fund and 20 percent by provident funds, insurance and financial institutions, according to its third-quarter investor presentation.