In a quarter where Warburg Pincus backed Fusion Finance, formerly, Fusion Microfinance declared losses of Rs 305 crore, Deloitte Haskins & Sells, the lender’s statutory auditor noted in its limited review report that the company’s ability to continue as a going concern could be under doubt.
“The statement for the quarter and half year ended September 30, 2024 has been prepared on a going concern basis. As at September 30, 2024, the Company has breached various financial covenants (in respect of borrowings amounting to Rs 5,618 crore) resulting in these borrowings repayable on demand. The Company is in the process of negotiations with lenders to obtain waivers from the right of immediate repayment for a period of at least 12 months from the balance sheet date,” the auditor notes in clause 8 of the Limited Review Report.
The auditor goes on to say that the lenders have not waived their right to demand “immediate repayment for a period of 12 months from the balance sheet date of issuance of the statement”.
“This condition results in material uncertainty which may cast significant doubt on the Company’s ability to continue as a going concern, and therefore the Company may not be able to realise its assets and discharge its liabilities in the normal course of business,” the report notes.
Deloitte further adds that the company’s ability to continue as a going concern is dependent on obtaining waiver from demand by lenders for immediate repayment of borrowings, and/or securing sufficient funds through other sources such as successful sale of loans, rights issue, and refinancing of borrowings.
This is not the first time that Fusion Finance has breached loan covenants. Even in the June quarter, the auditor noted that the company was in non-confirmation of a few covenants in respect of certain borrowing. However, Deloitte made no adjustments to financials.
“The management believes that steps taken will mitigate the company’s financial performance,” it noted in the July quarter review report.
Nonetheless, the language in the limited review report for September quarter is more cautionary.
In a call with investors, Devesh Sachdev, MD & CEO, Fusion Finance said the breaches (of covenants) is temporary and that the company is in discussion with lenders and rating agencies. “All twelve lenders have given waiver for Q1 and largely for the entire fiscal,” said Sachdev.
However he added that “some lenders have given waiver for Q1 and Q2 only”.
HSBC, Axis Bank, Yes Bank, ICICI Bank, SIDBI and IDFC First bank are the largest lenders according to the company. Exposure is more than Rs 500 crore per bank for the aforesaid names, the management added in the investor call.
Meanwhile, post the Rs 35.62 crore of losses in Q1, on October 4, Care Ratings downgraded Fusion Finance’s rating from A+ to A with negative watch.
Earlier on August 25, while Crisil maintained its rating on the lender’s term loan facility at A+, it downgraded the outlook from stable to negative. With Q2 losses more pronounced at Rs 305 crore after Rs 694 crore of provisioning towards stressed loans, it would be interesting to see if further rating action is initiated by agencies.
The management also clarified in the investor call that the breach of covenants is owing to gross non-performing assets, rise in net NPA and Care’s rating downgrade.
The lender’s gross and net NPA stood at 9.41 per cent and 2.41 per cent respectively in Q2 FY25 as against 5.5 per cent and 1.3 per cent respectively in Q1 and 2.7 per cent and 0.7 per cent respectively a year ago.
The company’s cash and cash equivalent stood at Rs 1,793 crore as of September 30, 2024, which is 15.62 per cent of total assets. Going forward, Fusion Finance’s ability to stay afloat will hinge on how soon its raises capital through the proposed rights issue.
Sachdev stated in the investor call that the company will file for a rights issue in December FY25 quarter. “Promoters are backing us,” the management reiterated at the call.
Fusion Finance is backed by US private equity major, Warburg Pincus, which holds 52.61 per cent stake in the company. Devesh Sachdev (MD & CEO) along with his wife holds 5.1 per cent stake in the company. On October 5, the board of Fusion Finance approved Rs 550 crore right issue. With assets under management of Rs 11,571 crore as on September 30, 2024 Fusion Finance is among the top five listed NBFC-MFIs in India.
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