Global rating agency Moody's Investors Service (Moody's) on Wednesday downgraded Indiabulls Housing Finance Limited's (IBH) long term corporate family rating to Ba2 from Ba1, citing renewed pressure on the cost and availability of funds.
The credit rating agency also changed the outlook to negative from stable and added that it does not expect the rating to go up over the next 12-18 months as it believes the tight funding conditions may persist for some time.
"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," the agency said in a report.
The stock has fallen 35 percent in 2019 and 57 percent in the last 1 year.
The agency also lowered IBH's foreign-currency senior secured rating to Ba2 from Ba1, foreign- and local- currency senior secured MTN program ratings to (P)Ba2 from (P)Ba1.
According to Moody's, the company's incremental cost of funding rose 45 basis points (bps) quarter-on-quarter during June 2019, while the company's balance sheet declined by 7 percent in 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," it noted.
Moody's said that the rating downgrade also factors in decline in asset quality during the June quarter, wherein stage 3 loans went up by 57 percent on a quarter-on-quarter basis, albeit from a low base.
It also 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 a reduction in either the quantity or quality of liquid assets that it is currently holding.
On the positive side, Moody's said that liquid assets of Indiabulls Housing Finance remain high, at around 24 percent 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.
Earlier in April 2019, the company had announced a plan 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.
