CARE downgrades Reliance Capital bonds' rating from 'A' to 'BBB'

Company protests move, says it had repaid Rs 650 crore of NCDs due on May 17

CARE Ratings has downgraded Reliance Capital’s (RCap’s) long-term debt and subordinated debt rating by three notches from “A” to “BBB” due to reasons including defaults by two of its subsidiaries — Reliance Home Finance (RHFL) and Reliance Commercial Finance (RCFL). The agency also said it would keep the firm on credit watch with developing implications.

A statement from RCap, meanwhile, protested the downgrade that put its credit score two notches above junk. In the statement the company said it had repaid Rs 650 crore of non-convertible debentures that were due on May 17. “There has not been any adverse change in the company’s operational parameters and/or any other circumstances from the time of the last rating action, just four weeks ago and, hence, the latest revision is completely unjustified,” RCap’s statement added.

The rating agency said RCap’s “financial risk profile is characterised by depletion of liquidity, high dependence on planned disinvestments for debt servicing and delays in fructification of such disinvestments.”

CARE said it would closely monitor the progress of sale of group assets/investments according to the revised timelines as stated by RCap. 

The management has said that the entire proceeds from the divestment process would be used only for making repayments and prepayments of debt. RCap is expecting to close in larger disinvestments, including that of Reliance Nippon Asset Management (RNAM) and Reliance General Insurance, and receive the proceeds by Q2 of FY20.

The new rating factors in RCap’s sizeable exposure to group companies in the non-financial business segments having weak financial profiles where RCap has extended guarantees and letters of comfort.

RCap has revised the divestment schedule. The company has divestment plans aggregating to about Rs 14,000 crore, including Rs 6,000-7,000 crore from RNAM and stake sale of general insurance company through strategic investor or from listing. 

The firm’s cash and bank balances stood reduced to Rs 47 crore as on April 30, 2019. Apart from this, RCap did not have any liquid investments or unutilised committed lines. 

RCap’s liquidity is critically dependent on monetisation of its sale of group assets and investments within the given timelines. This is crucial since there are scheduled repayments of non-convertible debentures and commercial papers worth Rs 1,035 crore and Rs 718 crore in May and June 2019, respectively. However, repayments of Rs 880 crore according to the scheduled maturity in May 2019 have been paid till date.

Promoter and promoter group owned 47.48 per cent stake in RCap as of March 31, 2019, out of which 96.93 per cent of shares are pledged indicating stressed liquidity position.