Thursday, July 05, 2007

Rating a crater

The more people working on an M&A transaction, the higher the likelihood the deal is a dog. This is doubly true where one of the Big Four and a Credit Rating agency team is involved.

A Year after US hedge fund DB Zwirn acquired a significant stake in Chennai-based NBFC (non-banking finance company) Dhandapani Finance, it has spotted a crater in the company’s balance sheet. Since the hole is big enough to erode Dhandapani’s capital, Zwirn will now have to look at ways to either recapitalize the balance sheet or plan an exit – as per this report.

When Zwirn had picked up 35% stake, it had appointed the management consultancy firm KPMG to carry out the due-diligence. Apparently KPMG did not find anything materially amiss then. Being a deposit-taking NBFC, Rating agency Crisil had on December rated its fixed deposit at FA+/stable. Fun is, the stake of the hedge fund in the NBFC will go up by an additional 10% when its convertible stock kicks in. All in a company that has a gaping hole for a KPMG diligenced balance sheet....and SEBI lines up rating agencies for IPO grading too - poor souls, retail investors....

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