Fri 08/28/2020 05:40 AM
Relevant Documents:
FY2019 Annual Report
July 4 Earnings statement
July 4 Press release
July 6 Earnings Call Transcript
Earnings Presentation
Moody’s Report on NBFCs
Aug. 27 BSE Filing
Bombay High Court Order

Asia-focused private equity firm PAG Asia’s Aug. 27 announced acquisition of a 51% stake in Edelweiss Wealth Management (EWM) for INR 22 billion ($298 million), is part of an ongoing restructuring of Edelweiss Financial Services Ltd., according to company filings and management guidance on earnings calls. That process, including sales of assets, has accelerated with the impact of Covid-19, and the group is also selling the entire wholesale loan book of non-bank financial company (NBFC) ECL Finance Ltd, which is valued at around INR 100 billion.

In its announcement for the PAG investment, Edelweiss noted that its Board has given in-principle approval to transfer, hive off, demerge, sell etc., all or part of the asset management business (EAM) of the Group (see structure further down) comprising of asset reconstruction, PMS, AIF and mutual fund businesses carried on by various subsidiaries, to a strategic investor at an appropriate time, including evaluating the option to list the equity shares of EAM holding company or one or more of its identified subsidiaries.

The announcement states the EWM business generated INR 11.28 billion in revenue in FY2019-2020, INR 2.8 billion profit after tax and had net worth of INR 12.75 billion, according to the Aug. 27 announcement.

Edelweiss Group Chairman & CEO Rashesh Shah had announced the plan to sell the ECL Finance wholesale book over the next two years on a July 6 earnings call, noting on the call that the book has lost 43% of value since IL&FS Ltd. was taken over by the government in October 2018.

Farallon Capital and SSG Capital are already in the process of forming an Alternative Investment Fund (AIF) to acquire around INR 40 billion loans from ECL Finance, as reported. The company took a haircut of INR 8 billion to INR 9 billion on that deal, Shah said on the earnings call. The first two tranches of the multi-tranche deal have closed, Shah said on the July 6 earnings call.

Edelweiss Financial Services reported a 36% year over year drop in revenue from operations to INR 19.3 billion in the fourth quarter ended March 31, and for the fiscal year its revenue from operations dropped 14% to 95.13 billion from INR 110.77 billion last year, according to July 4 earnings statement.

Edelweiss Financial Services reported a consolidated net loss of INR 28.18 billion in the fourth quarter from a profit of INR 4.05 billion in the same quarter a year earlier, as total impairments in Q4 2020 stood at INR 25.49 billion based on revisions in the Expected Credit Loss (ECL) model and impact of covid-19, the company said in a July 4 earnings release. For FY20, the company reported a consolidated net loss of INR 20.43 billion, from a profit of INR 10.44 billion the year earlier, the earnings statement shows.

Edelweiss Financial Services Structure

Edelweiss Financial Services is divided into four business verticals across 10 entities, according to the company’s earnings presentation.

The credit vertical has been grappling with asset quality and cash flow mismatches, and consists of ECL Finance, which focuses on retail as well as corporate lending, while Edelweiss Retail Finance offers retail mortgages, SME and business loans, margin financing, agriculture and rural finance, and structured collateralized credit. Edelweiss Housing Finance Ltd (EHFL) offers home loans, loans against property.

The asset and wealth management Edelweiss Global Investment Advisors (EGIA) vertical includes Edelweiss Securities, Edelweiss Broking and Edelweiss Asset Management (see PAG deal structure further down).

The third and fourth verticals are asset reconstruction and insurance businesses.

Asset and wealth management and the asset reconstruction company (ARC) together use around one-third of total capital and contribute 38% to company revenues and account for 33% of headcount. Credit contributes 32% of total revenue, and insurance contributes 30% of the company’s revenue, according to a company presentation.

Edelweiss Financial Services Ltd.’s structure before the PAG investment is given below:

PAG Deal Structure

The deal with PAG will divest a majority stake in the wealth management business of the Group (EWM) to PAGAC Ecstasy Pte Ltd and its Affiliates by issuing securities of its identified subsidiary(ies), subject to regulatory and other approvals, the Aug. 27 BSE announcement states.

Key deal terms include:
  1. Edelweiss Global Wealth Management Ltd. (“EGWML”) to issue Compulsorily Convertible Debentures (“CCDs”) to the Investor for a consideration of approx INR 22 billion
  2. Before investment by the Investors in EGWML, EGWML to acquire equity shares of Edelweiss Securities Ltd. (“ESL”), from the Company and its subsidiary.
  3. Simultaneously, there shall be a primary issuance of securities by ESL of approx. INR 140 crore to EGWML, Investor and/or other shareholders in ESL.
  4. Investor shall hold 51% economic interest in ESL equity on a fully diluted basis.
Steps (i) to (iii) are expected to take around 4-6 months, according to the BSE announcement.

Subsequent to completion of the above, the following reorganisation is planned:
a) Segregation of legal structure of the Edelweiss group relating to wealth management and asset management businesses into two separate business verticals namely Edelweiss Wealth Management (“EWM”) business and Edelweiss Asset Management (“EAM”) business respectively.
b) Demerger of EAM business (along with investments in subsidiaries carrying on EAM business) of ESL into a separate company, such that ESL only retains EWM business.
c) Demerger of the EWM business of EGWML (including CCDs issued by EGWML) to ESL such that, subsequent to conversion of the CCDs, the Investor shall hold 51% equity stake on a fully diluted basis in ESL.
d) Post completion of the aforementioned transaction steps, the Company to demerge its merchant banking business along with the investments in the subsidiaries carrying on the business of wealth management into ESL and subsequent listing of the equity shares of ESL, subject to necessary approvals, at an appropriate time.

Continuing NBFC Funding Shortfalls

Edelweiss’ non-bank finance companies - ECL Finance, Edelweiss Housing Finance Ltd. and Edelweiss Retail Finance Ltd. - had estimated a liquidity shortfall of INR 6 billion per month and total of INR 40 billion from March through August. The shortfall was due to a one-way moratorium as NBFCs offered the moratorium to their customers but did not get an automatic moratorium from their bank lenders, Shah said on the July 6 earnings call. The Reserve Bank of India had announced a moratorium on term loans from March 1 until Aug. 31 as a part of a Covid-19 relief package, as reported.

Shah said Edelweiss’ NBFCs planned to meet the shortfall by:
(i) raising INR 10 billion under the targeted long-term repo operation (TLTRO) announced by the Reserve Bank of India on April 17; and
(ii) raising INR 10 billion from the federal government’s INR 450 billion partial credit guarantee scheme 2.0 (PCGS) announced on May 20 and extended with modification on Aug. 17.

The firm would use INR 10 billion from existing cash and raise another INR 10 billion from sale of assets, Shah added.

On Aug. 12, ECL Finance raised INR 5 billion through an issue of secured non-convertible debentures maturing in 18 months at an annual coupon of 8.95%, according to a buyside and a sellside source. On Aug. 14, Edelweiss Housing Finance Ltd. raised INR 1 billion via secured non-convertible debentures maturing in 18 months at an annual rate of 9.25%, the sources said. Both the NCDs were raised under the government announced PCGS, the sources added.

Existing Investors

According to a July 4 company presentation and public filings, Edelweiss Financial Services had the following investors in its credit, wealth and asset management (EGIA), asset reconstruction and insurance arms.
  • Caisse de dépôt et placement du Québec (CDPQ) has a 20% equity stake in the credit business, which is 80% is held by Edelweiss, according to the July 6 earnings call. In March 2019, signed an agreement with Edelweiss to invest INR 180 billion in ECL Finance, according to a March 5, 2019 statement.
  • CDPQ also holds a stake in the ARC business, having made an investment of INR 50 billion over four years, according to an Oct. 3, 2016 statement.
  • US-based Kora Management and private equity firm Sanaka Capital will hold up to 15% of EGIA with an investment of INR 8 billion in three tranches, Shah said during the earnings call. Edelweiss in an Aug. 12, 2019 statement said that Kora would be investing up to $125 million in the Group, investing $75 million in EGIA and $50 million in Edelweiss Group. In a Nov. 12, 2019 statement Edelweiss said Sanaka Capital along with co-investors would be investing up to $75 million into EGIA. SPV I Ltd, a special purpose vehicle of Sanaka Capital had committed to invest around $44 million in EGIA and was in talks to invest a further $31 million.
  • Tokio Marine Holdings has a 49% stake in Edelweiss life insurance business while Edelweiss Group holds 100% of general insurance, Shah said on the earnings call.

Edelweiss Financial Services’ capital structure as of March 31, 2019 is as follows:

-- Dipika Lalwani, Rajhkumar K Shaaw
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