Moody's has also downgraded the housing financier’s foreign and local currency senior, secured medium-term note programme ratings to (P)B3 from (P)B2.
Moody’s Investors Service on Tuesday downgraded the corporate family rating and the foreign currency senior, secured rating of Indiabulls Housing Finance to B3 from B2, citing “significant uncertainty” about when the housing financier will regain access to market funding. The Singapore-based global ratings agency said access to funding would remain challenging for longer than expected for Indiabulls Housing Finance. “As a result, Indiabulls’ profitability will reduce because of lower net interest margins and higher cost-to-income ratios,” Moody’s said.
Moody’s has also downgraded the housing financier’s foreign and local currency senior, secured medium-term note programme ratings to (P)B3 from (P)B2. The outlook on all ratings remains negative. It added that an extended period without access to funds could lead to significant damage to Indiabulls’ franchise. It also ruled out an upgrade in the near term. “However, the outlook could return to stable if the company’s access to funding improves,” it said.
The agency said the wholesale funding markets remain largely closed to many financial institutions following the imposition of a moratorium on Yes Bank earlier this month, as well as the broader risk aversion currently prevalent in financial markets globally on account of the Covid-19 outbreak. Indiabulls’ reliance on asset sales as a source of primary liquidity to meet maturity obligations will increase as a result. “Prima facie, expected cash inflows (customer loan repayments) are sufficient to meet outflows (debt repayments). However, loan repayment rates and debt prepayments are volatile, increasing the risk of a missed payment and as a result the risk to creditors,” Moody’s said, adding that debt repayments over the last nine months, ending December 31, 2019, were much higher than the company expected.
The ratings agency expects the asset quality of Indiabulls’ Housing Finance to continue to weaken. “With the operating environment in India remaining challenging, Moody’s expects that the home loans and loans against property portfolios will also continue to deteriorate. The operating environment will be particularly impacted by the economic dislocations that will be caused by measures taken to combat the spread of the coronavirus such as instituting lockdowns across large parts of the country,” ti observed. Indiabulls’ loan book has been contracting since December 2018, with fresh disbursements have reduced significantly. The housing financier’s asset quality deteriorated, with a gross NPL ratio of 1.94% during the December quarter, compared with 0.88% during the March quarter. Bulk of the deterioration came from the real estate book, while some was also seen in home loans and LAP segments. Real estate sector is one of the most stressed sectors in India. Realty developers are facing the brunt of risk aversion by way of tight access to funding, the agency said.
The ratings could be further downgraded if Indiabulls’ liquidity position or asset quality deteriorates, or its debt repayments occur faster than scheduled, it stated. Indiabulls’ balance sheet is likely to contract over the next 12 months, as the company looks to conserve liquidity. “Capital remains a key credit strength,” it said.
The central bank last year did not approve the housing financier’s merger with Lakshmi Vilas Bank, which reflects negatively on Indiabulls Housing Finance, the ratings agency observed. It continues to make a negative adjustment on the HFC for corporate governance. There were allegations against Indiabulls that the company granted loans over the last few years to some entities with the intent of benefiting the promoters of the company. “In February 2020, the Ministry of Corporate Affairs…filed an affidavit in the court stating that its investigations reveal that either these loans were repaid or were standard loans in the company’s books. This development is a credit positive. Details that emerged on the group structure and related party type of transactions make the company less transparent to analyse and reduce the predictability of credit outcomes,” Moody’s said.