Two financial services firms of the Anil Ambani-led Reliance Group — Reliance Capital Ltd. and Reliance Home Finance Ltd.—have seen their credit ratings downgraded for a second time in recent weeks. The firms have also seen their share price fall, with Reliance Capital stock declining 35 percent since the start of April and Reliance Home Finance slipping 19 percent since April 4.
What’s plaguing the two companies?
While non-bank lenders have all been under pressure since September 2018 when Infrastructure Leasing and Financial Services Ltd. defaulted, the recent concern around the Anil Ambani group companies stems from their deteriorating liquidity profile.
Brickwork Ratings Ltd., which downgraded debt securities of Reliance Capital and Reliance Home Finance on April 19, cited the group’s deteriorating financial flexibility. Care Ratings, which downgraded securities of the two companies a day before, highlighted similar concerns. Both agencies have kept the debt instruments on “rating watch with negative implications”.
In separate notifications to stock exchanges, the two firms said the rating action is “completely unjustified and inappropriate”. It added that there hasn't been any adverse change in the company's operational parameters since the last time these agencies reviewed ratings.
Reliance Capital - Deteriorating Liquidity
Both rating agencies pointed to the limited progress made by Reliance Capital in unlocking liquidity.
According to the April 18 note from Care Ratings, cash and bank balances for Reliance Capital stood at Rs 11 crore as on March 18, 2019. “Apart from this, Reliance Capital did not have any liquid investments or unutilised committed lines,” the rating agency said. As such, Reliance Capital is dependent on monetisation of group assets and investments in order to meet scheduled payments, it said.
Non-convertible debentures worth Rs 593 crore are due in April and another Rs 1,035 crore and Rs 718 crore come due in May and June 2019 respectively, Care Ratings said.
The rating agency downgraded Rs 21,000 crore in Reliance Capital debt by one notch from A+ to A.
The revision in the ratings of Reliance Capital Limited (RCL) factors in extension of timeline for progress of planned divestments in various companies leading to depletion of liquidity and increasing refinancing risk.Care Ratings (April 18)
Citing the upcoming repayments and low cash balances, Brickwork Ratings, in its ratings rationale, noted that “timely receipt of funds from sale or exit from the core and non-core investments and recovery of loans given by Reliance Capital to non-financial group entities is critical to support its subsidiaries in the financial services segment”.
According to Brickworks, Reliance Capital has outstanding loans of nearly Rs 9,330 crore to various non-financial group entities and investments of about Rs 3,153 crore in compulsorily convertible debentures of these entities as on Dec. 31, 2018.
“Bringing this down is critical. Delays in recovering these loans or write-offs may impact the profitability and net worth of the company going forward,” Brickwork said in its rating release on April 19. The agency brought down the rating of Rs 18,100 crore in debt securities by a notch.
Reliance Home Finance - Collateral Damage
The liquidity concerns at Reliance Capital have in turn impacted Reliance Home Finance. Reliance Capital holds 47.91 percent in the home finance firm, while total promoter holding stands at 74.85 percent.
“With the moderation in Reliance Capital’s credit profile, its ability to provide support to Reliance Home Finance and other subsidiaries also stands moderated, thereby weakening the linkage factored into Reliance Home Finance’s ratings,” said Care Ratings in explaining its downgrade of the mortgage firm’s credit ratings.
Cash and bank balance for Reliance Home Finance stood at Rs 158 crore as on March 18, 2019 and cash credit facility stands fully utilised, Care Ratings said. The company securitised about Rs 291 crore during the month of March 2019, it said.
Reliance Home Finance has total outflows of about Rs 1,050 crore in April, May and June 2019, according to Brickwork Ratings.
Further, Brickwork Ratings said that no clarity has been provided on the quantum of loans extended by Reliance Home Finance to group companies and timely recoverability of funds is critical to ensure timely repayment of debt obligations.
Reliance Housing Finance is yet to submit its ‘no default’ statement as mandated by the Securities and Exchange Board of India, show the websites of rating agencies which publish these lists. Another unit of the group — Reliance Commercial Finance — is also still to submit its ‘no default’ statement.
Slowing Growth
With liquidity constrained, the two firms are likely to have limited scope for growth and remain focused on monetisation of their investments. Both rating agencies cite the need to speed up divestments across the group in order to meet funding needs of group companies.
“The ratings remain under credit watch with developing implications as CARE would closely monitor the progress of sale of group assets/investments as per the timelines stated by Reliance Capital in order to reduce its debt levels,” said CARE Ratings.
Brickwork added that it will monitor the group’s ability to raise funds from diversified resources, build up liquidity and restart fresh disbursements through its lending subsidiaries including Reliance Home Finance and Reliance Consumer Finance.
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