Care rating: Indiabulls Housing Finance on credit watch

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Updated: May 3, 2019 3:12:07 AM

The rating action is on account of Indiabulls Housing’s decision to acquire the stress-laden Lakshmi Vilas Bank, Care Ratings said in a note.

The top 10 individual corporate loan exposures on a group basis constituted 44% of Indiabulls Housing’s tangible net-worth as on March 31, 2018, up from 39% a year ago.

Care Ratings has put a clutch of Indiabulls Housing Finance’s debt instruments — most of them AAA-rated — on ‘credit watch with developing implications’, the home financier informed the exchanges on Thursday.
The rating action is on account of Indiabulls Housing’s decision to acquire the stress-laden Lakshmi Vilas Bank, Care Ratings said in a note.

Indiabulls Housing is the second top-rated non-banking finance company (NBFC) to be put on credit watch after PNB Housing Finance this week amid a tight liquidity situation, which has made fund-raising difficult and expensive for NBFCs.

Credit Suisse wrote recently that despite the liquidity situation having eased over the last six months, thanks to injections by the Reserve Bank of India (RBI) and yields for both government securities and companies having come down, NBFCs were yet to feel the benefits.“The spread for NBFC paper over corporate bond is still 40-50 bp higher,” the brokerage wrote.

Care’s action applies to the Indiabulls Housing’s non-convertible debentures (NCDs) worth `37,203 crore, subordinate debt worth `5,000 crore, publicly-issued NCDs worth `6,801 crore, publicly-issued subordinate debt worth `199 crore, perpetual debt worth `200 crore and part of its bank facilities worth `52,500 crore.
“The ratings have been put on ‘Credit Watch with Developing Implications’ considering the complex and unprecedented nature of scheme of amalgamation whereby a small sized bank would be merged into a large sized housing finance company,” Care Ratings said.

It believes that the proposed scheme of amalgamation would require approvals from multiple regulatory authorities and, as such, it would continue to monitor the progress on the proposed amalgamation and would resolve the credit watch once it has significant clarity and the proposed business plan and strategy of the merged entity.

The ratings also take into account the risk associated with chunky corporate mortgage loans. Asset quality, profitability, liquidity, credit concentration and capitalisation are the key rating sensitivities, according to Care Ratings. “The corporate mortgage portfolio includes lease rental discounting and residential construction finance. High borrower concentration and relatively riskier nature of the corporate mortgage portfolio can put stress on asset quality in times of economic turbulence in the future,” the rating agency said in its report. The top 10 individual corporate loan exposures on a group basis constituted 44% of Indiabulls Housing’s tangible net-worth as on March 31, 2018, up from 39% a year ago.

Credit Suisse pointed out bond markets differentiating between NBFCs. “More worryingly, the domestic wholesale debt market appears to be differentiating amongst NBFCs,” it observed.

The brokerage added that as increased sell-downs lead to contraction in the share of retail loans on the books of some NBFCs, credit ratings may come under watch.

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