Moody's Investors Service on Wednesday downgraded Indiabulls Housing Finance Ltd's (IBH) long term corporate family rating to Ba2 from Ba1 citing renewed pressure on the cost and availability of funds.
Moreover, it also changed the outlook to negative from stable. The credit rating agency also downgraded the company's foreign-currency senior secured rating to Ba2 from Ba1, foreign and local-currency senior secured medium-term note (MTN) program ratings to (P)Ba2 from (P)Ba1.
“The downgrade reflects renewed pressure on the cost and availability of funds for IBH and certain other finance companies in India. This presents a more challenging external environment than Moody's had anticipated," it said.
Moody’s said that since the rating is on a negative outlook, it does not expect the rating to go up over the next 12-18 months. It added that the outlook has been changed to negative to reflect the possibility that the tight funding conditions may persist for some time, which could further pressure other aspects of IBH's credit profile, such as profitability and asset quality.
The company's incremental cost of funding increased 45 basis points (bps) sequentially in the June quarter of 2019, and its balance sheet declined by 7% in the same period. According to Moody’s, this rise in funding costs was a key driver for the 28 bps decline in spreads in the same period, although profitability remains comparatively strong relative to its peer group.
The downgrade, Moody’s said, also factors in deterioration seen in asset quality in the June quarter, where stage 3 loans went up by 57% on a quarter-on-quarter (q-o-q) basis, albeit from a low base.
“Most of the increase in stage 3 loans has come from its corporate loan segment. This segment is facing significant headwinds for the overall finance company sector driven by a combination of very tight refinancing conditions and weak borrower profiles. This segment will continue to be a key source of asset quality risk for the company," it said.
Moody’s, however, said that liquid assets of Indiabulls Housing Finance remain high, at around 24% of its balance sheet at the end of June 2019.
“This continues to be a key positive credit driver as it allows the company to be able to withstand some period of impaired access to funding. As interest rates on high quality liquid assets have declined, the company's strategy of holding a relatively high pool of liquid assets -- a positive rating factor -- has become costlier, presenting a drag on earnings due to negative carry," it said.
At the same time, the firm's progress in improving the quality of its liquid assets has been slower than what was anticipated by Moody's.
The company had announced a plan in April 2019 to merge with Lakshmi Vilas Bank, a small bank, and thus get converted into a bank. This merger proposal is now awaiting regulatory approval from RBI.
“If approved and consummated, it would be a significant credit positive event for the company," said Moody’s.
The rating agency cautioned that the rating could be downgraded in case of the following scenarios. Firstly, if the company is forced to shrink its core business because of impediments on funding, which would impact its overall franchise including by way of lowering profitability; secondly, if there is further meaningful deterioration in asset quality and lastly, if there is reduction in either the quantity or quality of liquid assets that it is currently holding.