CRISIL has downgraded its rating on Bhartiya Samruddhi Finance Ltd’s (BSFL’s) bank facilities to ‘CRISIL BB-/Rating Watch with Negative Implications’ from ‘CRISIL BB+/Rating Watch with Negative Implications’.
The downgrade reflects significant deterioration in BSFL’s financial flexibility and liquidity, given investors’ and the banking sector’s apprehension towards microfinance entities based in Andhra Pradesh (AP), and the threat this could pose to the long-term sustainability of BSFL’s operations in case there is no fresh funding. The downgrade also reflects BSFL’s reduced net worth because of losses and the fact that its capital base will be adversely affected if adequate fresh equity is not infused in the next few quarters.
The rating continues to be on ‘Rating Watch with Negative Implications’. CRISIL will continue to monitor BSFL’s ability to raise additional resources or equity and service its outstanding debt in a timely manner.
BSFL’s liquidity and financial flexibility have weakened considerably in the past six months given the lack of fresh funding into the company despite several positive developments in the microfinance sector, including acceptance of the Malegam Committee’s recommendations by the Reserve Bank of India (RBI), the release of priority sector regulations by RBI, and the completion of corporate debt restructuring (CDR) process by banks for microfinance institutions (MFIs) based in AP.
Given the banking sector’s continuing apprehensions regarding lending to the microfinance sector, especially to MFIs with material exposures to AP, BSFL has been unable to raise additional bank funding or equity since the microfinance crisis (except for a Rs.250 million bank loan draw down in March 2011). Furthermore, timelines for infusion of fresh funds have been extended several times by BSFL in the past few months.
BSFL’s internal cash accruals have also come under increasing pressure. Repayment rates on the AP portfolio continue to be low at around 10 per cent, while those for the non-AP portfolio have fallen to around 90 per cent for the first four months of 2011-12 (refers to financial year, April 1 to March 31) from around 97 per cent earlier. In the absence of fresh funding, BSFL had to slow down disbursements significantly in the past eight months, even to non-AP states, resulting in a steady fall in repayment rates, and reduction in cash inflows, with the amortisation of the non-AP portfolio. BSFL is the only large AP-based MFI that did not exercise the option of restructuring its debt under the CDR mechanism. As the company continued to service its debt in a timely manner, its cash position eroded further. Given the standstill clause on debt repayments under the CDR mechanism, CRISIL’s downgraded its ratings on other AP-based MFIs that have undergone debt restructuring under the CDR mechanism to default or near-default levels. However, CRISIL did not downgrade its ratings on the debt instruments and bank facilities of BSFL with the expectation that fresh bank funding would ease its liquidity pressure within a few months.
CRISIL believes that BSFL’s cash inflows and outflows will be very tightly matched by October 2011, increasing the risk of delayed payment on its debt, unless fresh debt or equity is infused. BSFL had loans outstanding of Rs.10.5 billion as on June 30, 2011, of which exposure to AP is Rs.3.75 billion (all of it categorised as non-performing assets). CRISIL believes that for BSFL to service its debt in a timely manner, it will need to increase its performing loans to at least Rs.10 billion from around Rs.6 billion currently; this will necessitate raising fresh funds of Rs.5 billion to Rs.6 billion. BSFL is in advanced stages of discussion with equity investors and banks for additional financial support of about Rs.6 billion to Rs.8 billion including preference and equity capital. BSFL may also consider converting some of its debt to either equity or preference share capital mitigate strain on its liquidity. There are also plans to recapitalise by reaching out to existing equity investors. Additional bank funds may be raised only after the capital infusions or debt conversions are completed. However, given the steady erosion in BSFL’s liquidity, the timing and quantum of these transactions assumes criticality.
CRISIL believes that BSFL will need to infuse sufficient funds by end of September 2011, for it to continue servicing debt in a timely manner. Given that BSFL’s negotiations with bankers and investors are still ongoing, and that the timelines for infusion of funds may be extended further, its liquidity is critically poised, and the rating continues to be on ‘Rating Watch with Negative Implications’.
BSFL’s financial risk profile has been under substantial stress in the quarter through June 30, 2011, on account of net losses of Rs.827 million, driven by a 10 per cent provisioning for the non-performing portfolio in AP, and derecognition of interest income on this portfolio. The losses have resulted in an erosion in net worth to Rs.1277 million as on June 30, 2011 from Rs.2102 million three months ago. The company had a capital adequacy ratio of 16.5 per cent as on June 30, 2011. With full provisioning to be concluded on the impaired portfolio by March 2013, the company’s net worth is at risk of turning negative, unless a sizeable equity infusion materialises.