ICRA downgrades rating on debenture programmes of Edel Finance Co

ICRA has downgraded the rating on the long-term market-linked debenture (Rs 1,000 crore) and non-convertible debenture programme (Rs 750 crore) of Edel Finance Company Ltd (EFCL), retaining a negative outlook on both the instruments, even as it reaffirmed the rating on the non-banking finance company's Rs 1,000-crore commercial paper programme.

The rating on the long-term market-linked debenture (LTMLD) as well as the non-convertible debenture (NCD) programme has been downgraded from 'AA' to 'AA-'. The rating on the commercial paper (CP) has been re-affirmed at 'A1+'.

ICRA, in a statement, said the rating downgrade reflects the increased vulnerability in the Edelweiss Group’s wholesale lending book, with the heightened risk profile of the underlying assets, comprising real estate and structured debt transactions across sectors, and the consequent rise in stressed exposures.

The credit rating agency elaborated that the largely untested nature of the book (given the principal moratorium and bullet repayment structure in a significant quantum of the loans) and the constrained financial flexibility of the underlying borrowers due to a slowdown in their core operations and their leveraged capital structure, further adds to concerns regarding the wholesale book.

Given the current operating environment and the risk averse sentiment of investors towards non-banks, particularly wholesale-oriented entities, the ability of non-banks to mobilise resources at adequate rates is expected to remain constrained over the near to medium term, opined the agency.

"Although the Group has demonstrated its 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 going forward.

"The risks are, however, partly mitigated by the collateral cover maintained for such exposures, coupled with the recent capital raise, which would help reduce the overall leverage and provide some cushion to absorb losses, if any, on the lending book," said ICRA.

The group, according to the agency, also draws the advantage of in-house operations/ execution team and distribution network, which provides it with the ability to closely monitor and resolve assets should there be a requirement. The Group’s healthy liquidity profile at a consolidated level, and the shift in focus towards a more granular retail portfolio would help de-risk the portfolio and also provide comfort, it added.

Outlook: Negative

ICRA said the outlook on the long-term rating remains negative on account of the heightened risk profile of the wholesale lending business, coupled with the challenging operating environment, which could impact asset quality going forward. The outlook may be revised to stable if the stress on the wholesale book subsides and the group is able to maintain its asset quality and profitability levels.

The ratings may be downgraded in case of a deterioration in the asset quality of the credit book or the profitability indicators or a sharp increase in the leverage indicators, the agency said, adding the ratings can also be downgraded in case of an aggressive loan book growth, unrelated diversification and difficulty in resource mobilisation.

EFCL, which was incorporated in 1989, has received in-principle approval to operate as a core investment company (CIC). Going forward, EFCL is expected to act as Edelweiss Group’s main holding company, which would hold stakes in the key operating companies of the Group. EFCL would, in turn, be held by Edelweiss Financial Services Ltd, the flagship company of Edelweiss Group.