KKR Credit Quality

http://www.forbesindia.com/article/work-in-progress/kkrs-dice-with-debt/55421/1

The above article is a must read and very enlightening to understand the crisis of credit that is plaguing the Indian economy. the more pertinent question to be understood here; should we be blaming our public sector banks for the mess they are in due to bad loan crisis. When the internationally managed PE fund is bungling its small book of portfolio of India in which there are barely 30 accounts. or is it the other way around, that if KKR is willing to lend to AA rated accounts at 15%, it is understandable that the account is about to default on all its limits and loans.

While the most worrying element is the frauds, which are widely prevalent in Indian corporate sector and which are apparently visible on the face of it. It leads to serious introspection of the fact that what and how KKR (it applies to all types of lenders) is undertaking due diligence of the financial and legal, that they completely ignore the red flags; which are all pervasive and compulsive on some of its business accounts. If KKR cannot avoid fraud, after paying tens of millions of rupees for due-dilligence to some of the finest Chartered Accountants and lawyers in the country, what is it that the lenders are looking in the corporate to fund. KKR is only used as an example as they are known as the baddest sharks in the water, when it comes to scouring deals in the market.

On the other end of the spectrum, we are only taking the case of Kwality Ltd. and CG Power and Industrial Solutions Ltd. Kwality Ltd. generated turnover of Rs. 6724 Crores for FY18 with Net Profit of Rs. 71 Crores and it had grown from Rs. 5269 Crores with Net Profit of Rs. 140 Crores. Kwality Ltd. manufactures or processes, milk, dahi, chaach, cream and ready to drink milk products.

I don’t know or wish to discuss, what is the level of financial due-diligence that had undergone the Kwality Ltd. account by KKR but lets not get subjective about the process. But before conducting the financial due-diligence, perhaps they could have done market due-diligence to understand at how many outlets and through how many distributors, Kwality Ltd. is selling its milk products. If Kwality Ltd. is only selling milk in the market with turnover of Rs. 6700 Crores, it was moving 134 Crores litres of milk (taking milk price at Rs. 50 per litre) in the financial year. A commodity which is perishable with shelf life of less than 24 hours. The logistics required to move such huge amount of quantity of milk everyday, which is typically done in the morning or the evening. The processing required for the same to bring consistency with turnaround time of less than 6 hours. I certainly doubt the processing capability in terms of production.

Even if any accountant had tried to talk to Kwality Ltd. competitors in the market, they would have understood the capability of Kwality Ltd. in terms of procuring, processing and selling milk. i had never seen Kwality Ltd. milk sold in the markets. two or three years back, after KKR gave them money, the only thing they sold in the market was Akshay Kumar hoardings with unique packaging. But nobody knows on which shops, those glitzy packets were sold. It was far and wide marketing reach program of Akshay Kumar posing with Kwailty Ltd. milk and packaged products with no products on the shelves.

Kwality Ltd. has debtors of more than 3 months amounting to Rs. 1700 Crores in FY18. which milk processing company can afford debtors of 3 months. Milk is sold on cash by the companies to the shopkeepers or chains. They may compromise on margins but no credit. For frozen products, I can understand they have to extend credit but milk related products help rein in profits and not the turnover. Milk generally contributes to the turnover of milk processing companies and milk related processed foods help bring in better profitability.

Kwality Ltd. is a cat and mouse game in which KKR also got whipped. But what I don’t understand for the amount of resources they put in underwriting a transaction; they didn’t verify the marketing composition of the Company. Now Kwality Ltd. proudly puts the top link to CIRP (Corporate Insolvency Resolution Process) on its website. Kwality Ltd. market capital is Rs. 37 Crores with price ranging from Rs. 1 - 2 from their life high of close to Rs. 4000 Crores, two years back.

Can lenders avoid such companies, who have no products to sell in the market? Certainly if they do detailed marketing survey of how, why, where the companies products are sold. Kwality Ltd. was perhaps not even processing the fraction of what their numbers claim.

CG Power and Industrial Solutions Ltd. is another case study to understand. CG Power manufactures transformers, which are so essential for the power distribution in India, a power hungry country, with our energy needs still not largely met. CG Power is the only Indian company with that capability. They compete with international companies like Alstom and its likes, whose products cost at least 2x the CG’s equivalent products.

CG Power is the fundamental piece in the power distribution infrastructure of India. Now the company is under investigation for fraud allegations. With the fundamentals intact, it may not be the case of NCLT for IBC. But KKR was generous in writing cheques to CG Power.

CG Power fundamentally does not have larger problems that are ailing companies like Kwality Ltd. CG Power is part of Thapar Group, whose Group had investments exceeding Rs. 25000 Crores or Rs. 50000 Crores. But then all its other operating and cash generating companies are closing, shutting down and not to mention have defaulted on their loans.

CG Power was only plagued by the fact that it was the part of the group in which it only remained the performing from half a dozen large assets owned by the group. CG Power is a failure of legal due-diligence to understand, how and why the money was lent to CG Power and Thapar Group and how loosely bankers had tied CG Power in the fine print for some of the other assets of the group. CG Power possessed the joint and several liability of the group, if yes, then perhaps its management should have been changed as soon as the other assets were closed or shutting down.

I am pretty sure, KKR lawyers would have sought detailed clarifications from the existing bankers of the CG Power about their security and the charge they carried on CG Power, resulting from giving money to CG Power or Thapar Group. With the structured transaction that KKR undertakes, they must have taken proper clarification from the Banks. How CG Power international web of operations was spread across the globe, they were in best position to understand the structure of the CG Power (Indian and Global) business better than any Indian banker as they don’t understand the complicated route via which international banks offer products and solutions to corporates like CG Power.

Now we can always blame the market or the various cycles, which operate the market. But the fact remains, it is a systematic failure of the accountants and lawyers, which owe the primary responsibility of helping the banker/lender understand the company and its operations. They can always meet the promoters and the management for informal chats on how they are gaming the system, with which they have built their castle in the air, which can so easily be wiped in a single storm.

Good sound companies are built with the cushion to survive the storms (like CG Power), of course, in bad market conditions, everybody possess the likelihood of going under the weather like currently even our economy is. But CG Power is a casualty of the bungling’s in the group, so that had to be studied properly for all the surprises we are yet to hear.

Moreover never ever lend to a promoter, who does not value his own shares. A lot of promoters treat their own shares as an expensive paper but if they themselves do not respect their paper; perhaps we should be avoiding them at all costs. They do not deserve a single penny of the bankers/lenders or certainly the public.

For lenders, it is the good case of incompetence at how they fail to understand the businesses in which they are taking exposure. Kwality Ltd. Is the classic case, which exposes us to all the perils that lender should understand in order to avoid tripping on to the landmine, where they visualize gold.

Credit Card: A monster or a Service

Day before yesterday I received this message from one of the leading foreign bank majors present in India. I had used their card for more than a year. In the month of May, some scrupulous and duping amount of Rs. 1200 was charged extra to my account, which I declined to pay. Before proceeding further, read their message below:

“Please pay at least the minimum amount due on ABC Card to avoid defaults. A poor CIBIL score can deny you credit cards and loans in future. Ignore if paid.”

A poor CIBIL score. Does anyone understand what the hell is that? CIBIL stands for Credit Information Bureau (India) Limited. I belong to the investing and financing community, so I know what the hell is CIBIL. If your name features in CIBIL, you cannot take any loan from any bank, whatsoever. Although some NBFC may take upon the high risk of offering you a loan that too at a high interest.

Fearing CIBIL should I pay the amount or not?
First look at why the amount has been charged?

Firstly the amount was charged for late payment of my Bill, which I always pay on time or a day or two prior to that. The due date of the ABC Card is 23rd of every month and I make it a point to drop the cheque on 22nd or 23rd of every month for the amount due. Generally I make the payment in excess of my Credit Card amount, rounding it off to the nearest hundred.

Why do they put all such charges on your account without any fault of yours’?

Frankly speaking they have to, they don’t have any choice. It is like their bread and butter. It is the most essential part of their business model. The revenue part. Credit card companies are only spending there money on their customers. You can imagine the huge costs, the credit benefit, courier charges of bills and others, cheque processing, 24x7 call centre, tie-ups for promotions and others. It’s a costly affair and you don’t earn anything against it. The only way you can earn is when your customer defaults and they charge huge late payment charges with phenomenally high interest rates (normally 3% on monthly basis – annualized 36%).

In the month of April, I had dropped in the Cheque for the amount due on time. I was travelling so they requested me to arrange for the minimum amount of Rs. 150 by Cash to avoid late payment charges, as they found it difficult to trace my Cheque. Living with a friend in Mumbai, it was difficult to arrange for a person at my place to catch with up with the Bank person to collect Rs. 150. Knowing it was weekend and my flat-mate was also supposed to be travelling that day. But fortunately or unfortunately, his scheduled trip was delayed by a day. But then he was away arranging his tickets. Luckily we had one of the best landlord’s to be found in Mumbai, who was living in the same building, who paid the amount on my behalf.

Guess what? Next month, I am charged for the late fee with the interest and a service charge of Rs. 150 for Cash payment. Rs. 150 was the additional amount that I had paid over and above the amount due for the month of May. Look at their generosity; they settle this Rs. 150 towards all the bull-shit charges they have charged me with.

I wrote a mail telling them, I am not liable to pay all that stuff that you have charged me with. They always make a request to pay three days in advance to the due date. For orderly processing of the same by the due date, then why the hell the due date exists? They cannot bring down their due date down on paper due to regulations and the competition from their peers.

At times, this whole of theory and application of CAPITALISM sucks. I know we would have been worse off under Socialism.

I wrote abusing mails to them. I know most of the customers of any bank, store, mobile phone services behave as if they own those multi billion dollar company. But then that is how the dynamics of the market have emerged. I pity their employees, those guys are quite courageous to be working in such profile and an organization where everyday they encounter people who are yelling, screaming and abusing them. I would have definitely walked out from it the very next day. But then we do many things in our life, which we don’t like or don’t enjoy either.

Their modesty and patience level is appalling. They still write to me always in a humble and modest manner. Look at the following last week’s message:

“Dear customer, your ABC Card payment Rs. 240 is overdue. Pls pay immediately to avoid further service/finance charges. Call us on 022-________. Ignore if already paid.”

But they never threaten to cancel my card. Like my mobile phone provider says in absence of payment, we may hold up your services. A credit card company will never say you, Sir I am blocking your card from making any further transactions. Such are the dynamics of the money lending business. They continue to service me like any regular customer. If you banish your customer in money lending business, you may not see him forever. You always need to maintain the relationship with them. You need to lend more to recover your previous defaults. I am not a defaulter here.

I spoke to one of my friends working in the global bank (my credit card bank). He advised me to stay away from it. He said, “don’t worry, due to poor quality of service, they are planning to shut their Indian office and operations.” Its difficult to eliminate India for any MNC for its global operations. The other astonishing fact he quoted was,

The card you are holding belongs to some primitive scheme. Primitive means anything which is more than 12 months old. They have been instructed not to service the old scheme customers. Get them onto the new product then you may be able to get my share of due. This pace of dynamism in Capitalism is quite disturbing.

I just wish one change in their policy, you shut the doors on the customers you are not happy to serve.

At the end of all this, what should be my stand. I may looking for a car loan in few months and a home loan few years from now, what are the options that I have?

I know one thing they are not going to block card. The matter will linger on like that for couple of coming months. They they are going to break in my door and ask for one time settlement, which will be compounding from the base of Rs. 1200 to say Rs. 3000, 4000 or 5000 depends on the time. Coz as I said, it’s the compounding effect.