India Ratings and Research (Ind-Ra) has assigned JM Financial Credit Solutions' (JMFCS) proposed Rs 15 billion non-convertible debentures (NCDs) and Rs 15 billion bank loans an 'IND AA' rating with a stable outlook. The agency has also assigned JMFCS' Rs 20 billion commercial papers an 'IND A1+' rating.
The ratings reflect the credit strength of JMFCS' parent JM Financial and factors in Ind-Ra's expectation of timely support to JMFCS from JM Financial, if required. JM Financial group, a diversified financial services firm, has a conservative leverage policy (debt or equity at or below 3.0x) and maintains considerable liquidity in form of unencumbered liquid assets on its balance sheet in addition to having unutilised cash credit lines. This can support the refinancing needs of group companies in the event of a short-term liquidity squeeze in the system. Apart from wholesale lending business which is the largest constituent of the group in terms of equity and profits, the group has a large established franchise in the capital market related businesses (21% of operating profits), enabling a steady source of fee income.
JMFCS will incrementally drive the lending business of the group and thus has become strategically important to the group. The lending business of the JM Financial group constitutes around 65% of the group's equity and 65% of the consolidated profits (FY15) and is an important growth driver.
JMFCS is a partnership between JM Financial (99.99% stake) and INH Mauritius. The latter is a fund led by Vikram Pandit and associates and is backed by large global investors. The shareholding of JM Financial is scheduled to come down to 50.01% in FY17 post the conversion of the compulsorily convertible preference shares held by the fund into equity shares. The company will maintain the brand name of JM Financial and the parent company plans to maintain the majority shareholding and management control.
The group has been in the lending business for more than a decade through another lending arm JM Financial Products. JM Financial Products started lending operations in June 2003 while JMFCS started operations in 2HFY15. The company plans to focus largely on long-term, high-yielding wholesale lending, primarily the real estate financing business. This will result in a highly concentrated loan portfolio in a segment perceived to be risky.
Although the company has no loans overdue, its portfolio is largely unseasoned. Even few defaults would significantly impair JMFCS' operating performance and may impact its capital given the large ticket sizes. The company recognises the possible risk and has a policy to maintain leverage at or below 3x. Its capital base of Rs 9 billion is sufficient to support its growth for the next few years without necessitating equity infusions while maintaining leverage within the policy range. Furthermore, if the loan portfolio growth were to be higher than projected, both the partners can comfortably infuse their share of equity.
