M&M Fin Serv to raise Rs 500 crore via retail bonds

Mahindra and Mahindra Financial Services Ltd (MMFSL) plans to raise up to Rs 2,000 crore through a mix of retail bonds and commercial paper (CP) for business expansion.

The company intends to issue subordinated debt (bonds) worth up to Rs 500 crore. India Ratings has assigned "AAA" to retail bonds with a "stable" outlook.

The rating agency has also assigned MMFSL's proposed Rs 1,500 crore commercial paper (CP) issuance an "A1+" rating. This brings the company's total rated retail subordinated debt to Rs 1,000 crore and total rated CP amount to Rs 2,500 crore. The rated CP is a part of the company's overall CP program of Rs 7,500 crore.
 

The CP rating is driven by MMFSL's largely matched asset liability maturity (ALM) profile at the end of September 2015. The CP contributed 10 per cent to the company's funding in the first half of FY16. It was 13 per cent for FY15.

At the end of FY15, M&M's liquid investments were sufficient to cover the debt obligations of both M&M and MMFSL payable over a quarter.

The company typically maintains adequate unutilised bank lines (including term loans), which will provide comfort in the event of any liquidity or refinance risk arising in the short term, India Ratings said.

MMFSL's long-term ratings continue to reflect the credit strength of its parent -Mahindra & Mahindra Ltd (M&M) carrying "AAA" rating and holds 51.2 per cent stake in the company. It assumes expectation of strong, timely financial support to MMFSL from M&M, if required. MMFSL is a core subsidiary of M&M because of its high importance to the parent company. MMFSL finances about one-fourth of M&M's total sales in rural and semi-urban regions.

MMFSL is vital for M&M's strategy in rural geographies. MMFSL shares its parent's brand name and has strong operational linkages with it. Incremental delinquencies could stress MMFSL's cash flows and lead to Asset liability management mismatches, in which case MMFSL is likely to increasingly depend on external borrowings. However, access to funding remains comfortable, given its long-standing relationships with over 40 different banks.

MMFSL's asset quality remains under stress, and gross non-performing loan (NPLs) rose to 10.6 per cent at the end of December 2015 (FY15: 6.4 per cent, FY14: 4.8 per cent on a150-day NPL recognition).

Asset quality pressure may prolong over the next few quarters, given the weak agriculture and subdued rural construction activity and the high dependence of MMFSL on the rural economy.

MMFSL's capitalisation ratios (Tier I; December 2015: 15 per cent, FY15: 15.5 per cent, FY14: 15.5 per cent), though reasonable, could come under pressure with the increasing stress on asset quality, India Ratings added.