Negative outlook: Moody’s downgrades Indiabulls Housing Finance

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Mumbai | Published: October 15, 2019 5:28:43 AM

Even as liquidity conditions eased in May this year, several HFCs and other non-bank lenders have been unable to raise money from banks and mutual funds in an environment of heightened risk aversion.

Moodys on india, moddy indian economy, economic slowdown india, india growth, india gdp, economic slowdown china, Moodys Investors Service, MIS, moody on indiaThe downgrade comes days after the Reserve Bank of India (RBI) rejected a proposed merger of Indiabulls Housing with Chennai-based Lakshmi Vilas Bank (LVB).

Rating agency Moody’s Investors Service on Monday downgraded the corporate family rating (CFR) and the foreign-currency senior secured rating of Indiabulls Housing Finance to B2 from Ba2, citing the company’s ongoing challenges in terms of accessing funds.

Moody’s also downgraded Indiabulls’ foreign and local currency senior secured medium-term note (MTN) programme ratings to (P)B2 from (P)Ba2. The outlook on all ratings, where applicable, remains negative, the rating firm said in a statement. This means that Moody’s does not expect the ratings to be upgraded.

The downgrade comes days after the Reserve Bank of India (RBI) rejected a proposed merger of Indiabulls Housing with Chennai-based Lakshmi Vilas Bank (LVB). The housing finance company (HFC) is among the entities which took the hardest knock from a liquidity crunch that first emerged in September 2018 after defaults by the Infrastructure Leasing & Financial Services (IL&FS) Group.

Even as liquidity conditions eased in May this year, several HFCs and other non-bank lenders have been unable to raise money from banks and mutual funds in an environment of heightened risk aversion.

Apart from funding challenges, governance considerations were also a key driver of this rating action, Moody’s said, adding that the continued decline in on-balance sheet loans is a reflection of the company’s funding challenges. At the end of the June quarter of FY20, Indiabulls Housing said that its loan book has fallen to around `1.13 lakh crore, which implies a 10% fall on a year-on-year (y-o-y) basis.

Moody’s analysts wrote that while access to funding remains challenging, Indiabulls Housing’s pool of liquid assets, ability to run down the loan book and roll over of its bank funding act as a buffer against this risk in the short-term. “However, as the funding challenges prolong, the liquidity buffers may erode and expose the company to funding and liquidity risks. This is the key driver of the rating action,” they said in their rating rationale.

The proposed merger with LVB would have provided a “vote of confidence on governance”, Moody’s said, as it would have meant that the company passed the regulator’s fit and proper criteria for becoming a bank. It thus follows that the rejection of the merger proposal by the RBI is a credit negative.

The ratings agency expects the home financier’s balance sheet to contract over the next 12 months as the company looks to conserve liquidity. This will support capital and ensure that it remains a key credit strength. The ratings could be affirmed at their current level if Indiabulls Housing is able to demonstrate improved access to funding. They could be downgraded further if the company’s access to bank funding or liquidity deteriorates or if there is a meaningful deterioration in asset quality.

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