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    The Rise and Fall of KKR India Financial Services

    Editor, TRANSFIN.
    Jan 31, 2021 2:40 PM 4 min read

    Once upon a time, American investment giant KKR looked poised to reap handsome rewards from its non-bank lending venture in India.

    Named KKR India Financial Services Ltd (KIFS), at its peak it had extended about $800m of loans, enjoyed first-mover advantage, was being courted by global institutional investors, and seemed to be on the cusp of an IPO that would deliver its parent a windfall.

    Fast forward to July 2020, the company found itself struggling through a cruel turnaround in fortunes. It signed an all-stock deal with a local competitor - InCred Financial Services Ltd - to merge its credit unit.

    KKR's big bet on Indian credit collapsed rather spectacularly. How did this happen?

    Table of Contents

    Boom

    In 2009, KKR launched its credit unit in India, one of the first international investors to do so. Its initial commitment was $100m, which was ushered towards structured corporate loans by Citigroup veteran Sanjay Nayar, who oversaw KKR’s India operations.

    Nayar set up KIFS as an NBFC to amplify its lending powers and made several high-profile bets, including Alliance Tire Group, Dalmia Cement, Gland Pharma, Max Group, Avantha Group and Coffee Day Enterprises. A $100m stake sale to the Teacher Retirement System of Texas, an institutional investor, boosted confidence across the board and plans were afoot to take the credit unit public in 2015.

     

    Red Flags

    However, KIFS’s loan book was still thin to significantly excite investors, which is why it decided to ramp up lending...almost recklessly. During this period, some of the underwritings were questioned by the parent in New York. 

    • Loans were being doled out to unpromising promoters and entities with high risk of default under terms that were dangerously in favour of the borrower.
    • Loans were also being issued primarily to the holding companies instead of operating companies.
    • In many cases, little or no collateral was demanded.
    • Some deals led to over-concentration of risk - the ₹3bn ($41.12m) loan to Coffee Day Enterprises, for example, was green-lighted despite the fact that KKR held a 6% stake in the coffee chain via its PE arm.

    But the loan-issuing spree progressed enthusiastically nonetheless. A $100m injection by the Abu Dhabi Investment Authority in 2017 energised the team further and, with local debt markets booming, the time seemed ripe for a listing.

    Then, India’s shadow-banking honeymoon crashed to an end and KKR Financial’s loan book went into a tailspin.

     

    Bust

    In August 2018, infrastructure development and finance giant IL&FS went bust. It defaulted on its debt payments, including bank loan repayments and commercial paper redemption obligations.

    The IL&FS default sent shockwaves across the shadow-banking sector, which had until then experienced strong growth to a point where it commanded a record $393bn in assets. The resulting crisis was unforgiving. Debt mutual funds began writing down the value of their portfolios, stock markets plunged into volatility, housing and infra stocks fell, and a brutal liquidity crisis dragged down the economy. For some lenders, like DHFL, the IL&FS episode continues to bite to this day.

    Many creditors were hit harder than KKR Financial was by the ides of 2018. That doesn’t mean the latter escaped unscathed. Its loan book started deteriorating as the companies it had placed bets on succumbed to the increasingly tight credit environment and the general slowdown that hit the economy.

    Auto parts manufacturer Sintex stopped repayments in June 2019. As did Avantha Group (one of whose companies, CG Power, was found to have falsified its accounts). Many other borrowers were showing signs of stress. The Coffee Day investment soured rather darkly when the chain’s founder was found dead in a river in an apparent suicide.

     

    Reckoning

    As its India credit unit found itself in the crosshairs, KKR stepped in and assumed a more direct role in KIFS’s operations. It formed a task force to analyse each of the credit unit’s 33 loans.

    By October 2019, it found that as many as 18 of these risked slipping into default.

    In the following months, KKR did a few u-turns. Even as KIFS suffered a ratings downgrade and top-management turnover, KKR pledged $150m to boost its non-bank business in India.

    It was not enough. By July, reports of the deal with InCred surfaced. The merged entity will reportedly operate under the Mumbai-based consumer lender’s name while KKR will get a c. 20% stake in the same.

     

    Lessons

    Now, the KIFS fiasco was at most a disappointment for KKR, whose global business involves $234bn worldwide, including about $75bn in credit investments. The fiasco has also not had an effect on KKR’s stock price, which gained 39% in 2020. Moreover, KKR’s other two verticals in India - PE and real estate financing - are doing relatively well.

    But KIFS was supposed to be a grand success for the investment firm, and it was supposed to be a vindication for the potential of credit undertakings in India. Instead, it ended up being a cautionary tale for investors of the unsparing and unpredictable nature of the emerging market.

    It could also be seen as an admonishment of KIFS’s relationship-oriented lending, something championed by Nayar and his peers. This might have sparked the unit’s downfall as much as the IL&FS crisis - if not more. Its eagerness to get listed and make a killing caused it to commit several missteps and lend carelessly. Such an approach was bound to backfire.

    Wanting to be the friend of every entrepreneur might seem commendable. But when you’re the friend who’s lending money and you don’t ensure that the other party promises to make some adjustments so that your money is not lost, then maybe your rashness is partly to blame when your investment finally comes to naught?

    FIN.

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