INSUBCONTINENT EXCLUSIVE:
Few asset managers have enjoyed more success in the riskier corners of credit than KKR - Co
But after a decade-long attempt to wring big returns from India, the Wall Street titan has become a cautionary tale for investors in one of
the world's most tantalizing emerging markets.Rocked by the shadow-banking crisis that began rippling through India's financial system 2 1/2
years ago, KKR's local credit unit lost 15.16 billion rupees ($207 million) in the final nine months of 2019, wiping out nearly 40 per
While the unit posted a small profit last year as India's central bank pumped record amounts of cash into the Covid-battered economy, KKR is
$800 million of loans at its peak and at one point seemed poised to deliver a windfall to KKR in the form of an initial public offering
By late 2019, just before the pandemic plunged India into its worst recession on record, KKR had determined that more than half the loans at
the unit -- called KKR India Financial Services Ltd
-- were at risk of default.With a growing number of international money managers now looking for opportunities to sift through the wreckage
of India's debt markets, the story behind KKR's troubled bet illustrates what can go wrong
Interviews with a dozen people familiar with the firm's Indian operations, most of whom asked not to be identified discussing private
information, point to missteps that include questionable underwriting assumptions and a decision to accelerate lending in the lead-up to the
Goenka, a managing director of Nisus Finance Services Co
and two-decade veteran of India's credit markets.In a response to questions from Bloomberg, KKR said its India credit unit enjoys a strong
said.The India credit unit recorded a pretax profit of about $9.7 million in 2020, according to one person familiar with the matter
While KKR was among the most high-profile casualties of the 2018 crisis, it was far from the worst hit
Four of India's largest non-bank financiers have defaulted on their debt, while Franklin Templeton shocked market participants in April by
freezing withdrawals from six Indian debt funds and telling investors it would wind them down.When viewed in the context of KKR's global
business -- the firm oversees $234 billion worldwide, including about $75 billion in credit investments -- the losses suffered by the India
They've also had little discernible impact on KKR's stock price, which gained 39% last year and hit a record high this month.Still, India
credit was supposed to be a bright spot.KKR was one of the first big international investors to enter the market in 2009, committing $100
million to launch the business
Like the rest of KKR's India operations, the credit unit was overseen by Sanjay Nayar, a Citigroup Inc
veteran who had been handpicked by KKR co-founder Henry Kravis a year earlier.Nayar saw big potential in structured corporate loans, which
tend to offer higher interest rates than traditional bank loans but come with fewer creditor protections
He set up the unit as a non-bank finance company, rather than as an investment fund
Among other things, that enabled KKR to amplify its lending power by taking on leverage.Early additions to the portfolio included Max Group,
a conglomerate founded by health care and insurance tycoon Analjit Singh, and Avantha Group, the paper-pulp to power-plant empire led by
Rupee-denominated loans to the companies yielded about 12 per cent, and they performed well as India emerged from the global financial
crisis relatively unscathed, two people with direct knowledge of the loans said.Coffee Day Resorts was another high-profile bet
Siddhartha, through its private-equity business in 2010 and extended loans via the credit unit in 2012
KKR usually avoided lending to companies in its private-equity portfolio to prevent an over-concentration of risk, but Nayar persuaded his
bosses in New York to make an exception, according to one person involved in the deal.By 2013, KKR's India credit team was riding high
The Teacher Retirement System of Texas, one of America's largest institutional investors, had agreed to take a $100 million stake in the
unit, while KKR had also raised about 4.25 billion rupees for a separate India-focused credit fund.KKR began exploring the possibility of
taking the India credit unit public in 2015, four people familiar with the discussions said
The feedback from IPO bankers was that KKR's loan portfolio was still too small to attract strong investor demand, so Nayar and his team
decided to ramp up lending.As they doled out credit at a quickening pace, some underwriting decisions were questioned by members of KKR's
global credit group who had been co-investing with the India unit, two people familiar with the matter said.One of the bets that raised red
flags was Resonance Eduventures Ltd., a training school for India's top engineering college
KKR's credit funds typically demanded collateral from borrowers in the form of physical assets, but the loans to Resonance were backed only
Verma's shares in the unlisted company
That left KKR lower in the creditor pecking order if Resonance had trouble repaying its debt
KKR's bargaining power in the event of default was also limited because Verma was seen as integral to the company's value
The loans went ahead despite the global team's concerns.Enthused by the India credit unit's fast growth, Abu Dhabi Investment Authority, one
of the emirate's sovereign wealth funds, bought a stake in the firm for about $100 million in 2017
With local debt markets booming, the time for an IPO seemed ripe.Everything changed in August 2018
A surprise default by Infrastructure Leasing - Financial Services Ltd., one of India's largest non-bank financiers, exposed the shaky
economic underpinnings of a credit expansion that had propelled the nation's shadow banking assets to a record $393 billion
Many Indian companies that had become reliant on short-term loans suddenly lost access to funding
the chaos as an opportunity, telling Bloomberg in an October 2018 interview that he was looking to buy portfolios from struggling shadow
But by the end of that year, KKR's global investment committee had taken a more active role in the business, rejecting Nayar's requests to
extend more credit and make acquisitions, two people familiar with the matter said.Brian Dillard, a KKR managing director taskedin late 2018
with overseeing the firm's credit operations across Asia, told colleagues he was worried the India unit would become a drag on the firm's
regional ambitions, two people said
Scott Nuttall, KKR's co-chief operating officer, and Henry McVey, chief investment officer of KKR's balance sheet, also expressed concerns
about lax underwriting.Investors in KKR's separate India credit fund were becoming more circumspect too, in part because of the turbulence
In early 2019, after KKR's initial fund had reached its maturity, they turned down the firm's invitation to invest in a new one, two people
familiar with the matter said.Meanwhile, the credit unit's loan book was deteriorating
Sintex-BAPL Ltd., an auto-parts manufacturer, stopped repayments in June 2019, a little more than a year after KKR made its original loan
Avantha Group was also falling behind on repayments, two people familiar with the matter said
Several other borrowers, including Resonance, were showing signs of stress.KKR eventually wrote off the value of the Sintex and Resonance
The latter has been mentioned on internal KKR calls as a textbook case of how not to structure deals, two people familiar with the matter
In late 2019, Indian regulators including the Ministry of Corporate Affairs said that an Avantha Group company -- CG Power - Industrial
Solutions Ltd., whose shares KKR held as collateral -- had falsified accounts
CG Power said in October that the impact of the accounting irregularities could be assessed only after investigations by the company and
KKR has set aside provisions for the loan.Sintex, Resonance and CG Power didn't respond to requests for comment.Things had also gone badly
wrong at another big KKR investment -- Coffee Day
In July 2019, Siddhartha, the coffee chain's founder, was found dead in a river in an apparent suicide
one of the company's private-equity investors that he didn't name
Coffee Day's board, which included Nayar, ordered a probe into allegations that Siddhartha had embezzled money.The following month, senior
KKR managers in New York took an even more hands-on role at the India credit unit, according to two people familiar with the matter
The firm formed a task force to look into each of the unit's 33 outstanding loans, concluding by October that as many as 18 of them risked
slipping into default.Around the same time KKR India Financial Services had its long-term credit rating cut to AA, the third-highest
investment grade, from AA+ by Crisil, the local unit of S-P Global Ratings
Borrowers of more than half of its 59 billion rupees in loans weren't fully complying with the original terms of their debt agreements,
Krishnan, the CEO of KKR's India credit unit, left the same month
He was replaced by Kapil Singhal, a Goldman Sachs Group Inc
veteran who had been hired by KKR shortly before Krishnan's departure.Working with Dillard, Singhal started looking for opportunities to
sell KKR's loans or the entire unit
Several of the country's non-bank lenders balked at a deal on valuation concerns, three people familiar with the matter said.With worries
about another rating downgrade by Crisil mounting, KKR pledged to make a further $150 million available to the India credit unit in January
It said in a statement at the time that the move would bolster the unit's position in India's credit markets, though the money has yet to be
drawn down.By July, Coffee Day's probe into Siddhartha's death had concluded
The entrepreneur had siphoned off $360 million so he could buy back shares held by private-equity investors, repay loans and keep up with
interest payments on other borrowings, Coffee Day alleged, citing the findings of an investigation led by a retired senior official from
India's federal law enforcement agency
The investigation didn't find any fault with lenders or private-equity investors
Police in Karnataka, the Indian state where Siddhartha died, said the cause was suicide but declined to comment further.The following week,
InCred Financial Services Ltd., a local consumer lender backed by former Deutsche Bank co-CEO Anshu Jain, said it had signed an agreement to
merge with KKR's credit unit in an all-stock deal, without specifying terms
KKR will get a roughly 20% stake in the merged entity while the other two investors in the credit unit -- Texas Teacher and Abu Dhabi
Investment Authority -- will also hold minority positions after the transaction is complete, according to three people familiar with the
The company will operate under the InCred name, the people said, adding that terms of the deal have yet to be finalized and could
Texas Teacher and ADIA declined to comment.In the months since the merger agreement was announced, India has been pummeled by Covid-19 along
with much of the rest of the world
Yet at the same time, local credit markets have proven remarkably resilient thanks to central bank stimulus
One gauge of Indian debt risk -- the spread on the highest-rated corporate bonds over government notes -- spiked to a six-year high in May
but has since fallen close to the lowest level since at least 2002
International money managers including Apollo Global Management Inc
have been scaling up their India lending businesses.KKR, meanwhile, has taken advantage of buoyant markets to reduce risk
The India credit unit's net leverage ratio now stands at 0.9, down from 2.4 a year ago, one person familiar with the matter said
Last year the firm offered to repay about $90 million of its debt early, but most of its lenders chose to retain their exposure, the person
Singhal resigned around the same time, after just 10 months running the credit unit.Under Dillard, KKR's Asia credit team has lentmore than
$1 billion over the last 18 months and is preparing to raise its first dedicated credit fund for the region
director at KRIS, an investment advisory firm in Mumbai
is published from a syndicated feed.)
