Rating agency Icra has downgraded the long-term non-convertible debentures of Edelweiss Financial Services from "AA" to "AA-" on increased vulnerability in its wholesale lending book and risks of rise in stressed exposures.
The outlook on debentures remains negative, Icra said in a statement. The agency re-affirmed the Al+ rating assigned to the company's commercial paper and short-term NDCs. An Al+ rating indicates a very strong degree of safety regarding timely payment of financial obligations.
Icra said the rating action takes into account heightened risks from the underlying assets, consisting of real estate and structured debt transactions across sectors. The book is largely untested given the principal moratorium and bullet repayment structure in a significant quantum of the loans).
The financial flexibility of the underlying borrowers is constrained due to a slowdown in their core operations, their leveraged capital structure adds to concerns regarding the wholesale book, it said.
Edelweiss group in a statement said the rating action is largely a reflection of an unstable and volatile external milieu. It stems out of the credit rating agency’s apprehension of a worsening economic climate and its impact on asset quality. Edelweiss stock closed 4.9 per cent higher at Rs 175 per share on BSE.
"While the concerns raised may be tenable, the environment is getting better with steps taken by RBI to infuse liquidity and reduce lending rates. The past nine months have been challenging and we have managed fairly well. The next nine months will bring a better economic environment and we will continue to manage our businesses and asset quality profile," Edelweiss added.
Icra in its rating note cited the current operating environment and the risk averse sentiment of investors towards non-banks, particularly wholesale-oriented entities, for its decision.
The ability of non-banks such as Edelweiss to mobilise resources at reasonable rates is expected to remain constrained over the near-to-medium term in the current operating environment. Investors are risk-averse towards non-banks, particularly wholesale-oriented entities.
The Group has demonstrated its ability to maintain adequate reported asset quality. But a prolonged slowdown in the real estate sector, coupled with the liquidity crunch in the overall market could adversely impact asset quality. The risks are, however, partly mitigated by the collateral cover maintained for such exposures and the recent capital raise.
The recent capital raise would help reduce overall leverage and provide some cushion to absorb losses, if any, on the lending book, the rating agency added.
The company has ensured that it remain well-capitalised and have enough liquidity at all times. In April 2019, Edelweiss raised $250 million from Canadian financial services entity CDPQ, of which $150 million has already been received. "This has not only reduced our debt equity ratio to 3.9 but significantly improved our capital adequacy to 19.8 per cent," the company said.
"The company has, at all times, maintained more than adequate liquidity on books (11-13 per cent of our borrowings). This along with our diversified business model, multiple revenue streams and our proficient operational capabilities gives the confidence to take care of any possible adverse environmental impact," it added.
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