KKR's NBFC eyes direct lending as credit demand remains subdued in India

As credit demand remains subdued in India, KKR India Financial Services, the non-banking financial services company (NBFC) and credit business of private equity giant KKR, is looking to develop new themes that go beyond its core offering of structured debt and offer companies capital structures that can help them ride through business cycles.
One such area is medium to long duration term loans, which KKR calls direct lending. ‘‘We are trying to provide vanilla cash flow-yielding loans, with deal structures that work well for operating companies to give them flexibility,” says B V Krishnan, member, KKR and CEO of KKR India Financial Services. The potential customers for these loans are mid-market firms with sales of Rs 4 billion to Rs 15 billion, who may have a requirement for term loan financing. Between 2010 and 2012, many companies built capacity funded by bank loans but have not grown enough to fully use this capacity, which leads to two kinds of issues.

One, the loans are maturing but were not structured keeping in mind a possible slowdown in the economy.

Normally, the companies would have extended their payables or use their working capital money to pay for these loan amortisations as they come up. Or, they would go to an NBFC and take a short-term loan. Two, there are many companies that are supplying into cyclical sectors such as commercial vehicles or tractors. They have maturing loans on the one side and need capital for future growth.

KKR's NBFC works with these companies to figure out what sort of term loans would suit these companies to conserve cash and enable a capital structure that fuels growth for several years.

‘‘Credit to the mid-market is a very large market: $30 billion-plus, with different needs. We may or may not be able to address all of that. But in the long run, we think that direct lending as a product — term loans which are flexibly structured — is a significant opportunity,” says Krishnan.

It has done 5-6 such deals, totalling Rs 7 billion to Rs 8 billion. The credit arm of KKR has deployed over $5 billion in the last 8 years in India across 115 transactions. This was driven largely by structured financing, where it provided lending at the holding company level or take out financing to promoters to buyback stake from a PE firm.  Now, it is betting on themes like direct lending and M&A financing to drive future growth for KKR's credit business.  ‘‘Every six to 12 months, whenever the market dynamics change, we come up with certain themes to solve problems in the market,” says Krishnan.

In the past few months, it figured out banks are pulling out or are not able to provide flexible finance to firms because of their problems. It went to firms and offered to refinance the term loans — offer them capital for growth and operations.

Last week, the NBFC tied up with Tranzmute Capital, a business transformation and advisory firm headed by Narayan Seshadri. 

“There are many mid-market firms that have reached a certain scale. But to grow from that to much higher scale, they need external help,” says Narayan. 

The external help can be capital in some cases. In many cases, it is about governance, hiring the right people, evolving a long-term strategy.