PE firm KKR looks to steady ship, focus on controlling debt structures

Didn't expect promoters to 'hollow out' firms, says India head Sanjay Nayar

A week after he stepped down from the board of the embattled Coffee Day Enterprises or CDEL (which runs Café Coffee Day), Sanjay Nayar, the country head of global heavyweight private equity firm KKR, said the investment firm will now ensure deeper diligence and tighter control on debt structures.

While the focus has been on Gautam Thapar-led CG Power and Café Coffee Day, private equity analysts said that at least half a dozen KKR-financed firms that have defaulted on loans classify as non-performing assets (NPAs) and these include Sintex, JBF Industries, and Kwality Dairy. 

The firm’s primary non-banking financial company — KKR India Finance (KIFSL) — focuses on wholesale lending, including promoter financing and mezzanine, and acquisition financing, and thus, it has significant single-borrower exposure. In recent years, the company grew its loan book at a compound annual growth rate of 35 per cent to reach around Rs 5,878 crore as on June 30, 2019. 

The concentration in the portfolio remained high, with the top 20 borrowers constituting 52 per cent of the loan book as on June 30, 2019. According to a CRISIL report, while the reported gross NPA metrics have been low so far, potential stressed accounts in the portfolio have increased significantly in the recent past, some of which are already in various overdue buckets. 

CRISIL notes that part of the recent stress in a few accounts manifested due to unexpected events and challenges linked to fraud and governance. 

While KKR has executed almost 160 credit transactions valued at over $6 billion, what made these other deals go awry? Nayar said most of the above trades were done in 2017 and 2018, and in at least half the cases involve promoters who had hollowed their companies out, even as banks were asleep at the wheel. “We are last-mile financiers and what I can say is that in the case of these six companies, the issue is mostly because of related-party transactions,” he said. 

For example, CDEL had around 42 different subsidiaries operating under its umbrella. The other part of the problem, Nayar conceded, has been poor underwriting. He was non-executive and nominee director at the coffee retail chain’s four-member board until recently. 

The coffee chain has delayed its first- and second-quarter results because of the ongoing probe into its accounts as well as the alleged suicide letter of its founder V G Siddhartha. Sources said the debt its founder had undertaken on his name almost equalled or was greater to that of the company’s. So, where did the borrowed money estimated to be worth about Rs 5,000 crore go?

Siddhartha used part of the money to buy coffee plantations which he thought was a good move, and some funds were invested in other businesses of the group, but the rest is anyone’s guess, said an insider. CDEL’s other ventures include hospitality logistics company called Sical and Tanglin (a tech park and SEZ).

Tanglin is in the process of being sold to Blackstone and Sical will also be divested soon, following which the board and the management will drive to bring liquidity into the company. 

Nayar said he is now focused on three things: Resolution, which is not easy in a stressed market, monitor orange signals in a performing portfolio, and third to recreate and create a framework for big business building in the near future. 

“I think we have learnt the lesson that you have to do deeper forensics, and that you can’t trust anyone (in this business),” he said, adding, “Going ahead, the company would aim to control the debt structure like one controls the equity.” 

KKR has a business plan presentation in the next couple weeks when much of that will be discussed internally, the sources said. In recent times, KKR has executed pure-play private equity deals over $1 billion, which include Euro Kids, Ramky Engineering, and Radiant Max. KKR also invested in an infrastructure investment trust (InvIT), sponsored by Sterlite Power Grid.

KKR has $4 billion of assets under management in India, including the $1.5-billion worth credit business, which is positive on the resolution of stressed assets. A few key platforms that KKR aims to build on include health care, education, financial services, and waste management. Where KKR has not been as active is pharma and information technology, and that will change, Nayar added.