Moody’s Investors Service has downgraded Indiabulls Housing Finance’s (IBH) long-term corporate family rating to ‘Ba2’ from ‘Ba1’ in the backdrop of renewed pressure on the cost and availability of funds for some finance companies in India.

Change in outlook

The global credit rating agency has also downgraded the company’s foreign currency senior secured rating to ‘Ba2’ from ‘Ba1’, foreign and local-currency senior secured MTN (medium-term note) programme ratings to ‘(P)Ba2’ from ‘(P)Ba1’.

Moody’s said the outlook has been changed to ‘negative’ from ‘stable’ 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.

According to the agency, obligations rated ‘Ba’ are judged to be speculative and are subject to substantial credit risk.

Modifier ‘1’ indicates that the obligation ranks in the higher end of its generic rating category, and the modifier 2 indicates a mid-range ranking.

In its ratings rationale, the agency said: “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.”

Moody’s referred to the fact that the company’s incremental cost of funding increased 45 basis points (bps) quarter-on-quarter ending June 2019, while the company’s balance sheet declined by 7 per cent over the same period.

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. According to the agency, liquid assets remain high, at around 24 per cent of its balance sheet at June-end 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.

“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 agency said. Moody’s underscored that the downgrade also factors in deterioration seen in asset quality in the quarter ended June 2019, where stage 3 loans went up by 57 per cent on a quarter-on-quarter 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,” the agency said.

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