Financial Companies Continue To Witness Rating Downgrades

Credit rating agencies downgraded a host of Indian finance companies over the last two days on account of liquidity issues and exposure to real estate sector, among other factors.

While CARE Ratings downgraded Reliance Capital Ltd., Piramal Capital and Housing Finance Ltd., Edelweiss Financial Services Ltd. and PNB Housing Finance Ltd.; Brickwork Ratings downgraded Srei Infrastructure Finance Ltd.

Non-bank lenders have been under pressure since September after a series of payment defaults at Infrastructure Leasing and Financial Services Ltd. increased the cost of market borrowing, causing a liquidity crunch.

Here’s a list of rating downgrades:

CARE Downgrades Reliance Capital

CARE Ratings Ltd. put debt instruments of Anil Ambani group flagship Reliance Capital Ltd. on credit watch with negative implications. These include its long-term debt programme worth Rs 18,000 crore, sub-ordinated debt worth Rs 2,000 crore and market-linked debentures worth Rs 1,000 crore, according to the rating agency’s note on July 6. The rating assigned is CARE BBB—moderate credit risk.

Citing reasons for its rating action, CARE said Reliance Capital could partly use proceeds from its asset sales to meet debt obligations of its subsidiaries. The parent had guaranteed the debt of Reliance Home Finance Ltd. and Reliance Commercial Finance Ltd., the two units that have already defaulted on payments.

Reliance Capital hasn’t provided the repayment schedule of the guaranteed debt and CARE does not have clarity on the impact of these payments on its liquidity profile.

As per the earlier commitment, CARE said, the entire proceeds from sale of stake in Reliance Nippon Life Asset Management and Reliance General Insurance Company Ltd. were to be used to pare the parent’s debt.

What CARE will monitor

• The progress of sale of group assets/investments as per the revised timelines stated by Reliance Capital to reduce debt.
• Reliance Capital’s ability to maintain liquidity levels and divest group exposures as envisaged and unlock value in a timely manner, reducing leverage.

The ratings will be reviewed by the third week of July.

Brickwork Downgrades Srei Infra

The rating agency downgraded SREI Infrastructure Finance Ltd.’s non-convertible debentures worth Rs 4,227 crore to BWR AA from BWR AA+ and revised the outlook to ‘Negative’ from ‘Stable’. It also reaffirmed the rating of commercial papers at BWR A1+, according to Brickwork’s note on July 5.

The rating revision factors deterioration of asset quality due to weak credit profile, low profitability, high gearing (or leverage) and liquidity stress faced by non-bank lenders affecting the borrowing capacity of the company, Brickwork said, adding the outlook is revised to negative considering the risk of further weakness in asset quality.

On a standalone basis, the company’s gearing stood at 4 times as of March. On a consolidated basis, its tangible net worth—excluding any value derived from intangible assets—stood at Rs 4,097 crore against a total debt of Rs 33,224 crore resulting in a high gearing of 8.1 times, the report said.

What Brickwork Will Monitor:

• The ability of the company to borrow for continued growth while maintaining its cost of funds and profit margins.
• The ability to reduce its gearing.

CARE Downgrades Piramal Capital

CARE Ratings downgraded long-term debt instruments and bank facilities of Piramal Capital and Housing Finance Ltd. worth Rs 37,500 crore to CARE AA from CARE AA+. The outlook on these facilities has been maintained at ‘Stable’.

The revision in ratings considers increased risk averseness in the market towards non-bank financial companies/housing financiers and the company’s significant exposure to real estate sector, which is witnessing a slowdown and increased refinancing risk, according to CARE’s note on July 5.

CARE, however, said the company’s asset quality parameters remain comfortable and it has been able to take proactive measures in identifying and resolving potential stressed accounts.

What CARE Will Monitor:

• Continuing parent support, stable asset quality, client and sector concentration, capitalisation levels, liquidity and profitability.

Piramal Capital—the wholly owned subsidiary of Piramal Entreprises Ltd.—was recently downgraded by ICRA Ltd. due to its exposure to the real estate sector.

CARE Downgrades Edelweiss Financial Services

CARE downgraded Edelweiss Financial Services Ltd.’s NCDs worth Rs 284 crore to CARE AA- (Stable) from CARE AA (Positive).

The rating revision for Edelweiss Financial, too, considers increasing risk averseness in the market towards NBFC sector and higher real estate exposure.

What CARE Will Monitor:

• Performance of the company’s new businesses, asset quality and profitability.

CARE Revises Ratings Of PNB Housing Finance

CARE Ratings said all facilities of PNB Housing Finance Ltd. have been removed from credit watch with developing implications and downgraded to CARE AA+ from CARE AAA with a ‘Stable’ outlook.

CARE had last put the company’s facilities on rating watch with developing implications on April 29.

The ratings have been revised in view of the elongated liquidity tightening cycle and the consequent impact on the real estate sector, resulting in increased vulnerability of the company’s corporate loan book, according to its note on July 5.

The rating agency also said PNB Housing would need to raise substantial capital to bring down its gearing levels (about 10.5 times as of March). More so, because of its exposure to the real estate sector, and the regulatory requirement to keep tier-1 capital buffer—a key measure of financial strength—at 10 percent of its risk-weighted assets. The buffer was marginally higher at 11 percent as of March.