Moody's downgrades IIFL Finance's secured debt, changes outlook to stable

Agency says rising Delinquencies, defaults to hit profitability

Moody's has downgraded IIFL Finance Ltd's corporate family rating (CFR) and secured debt from “B1” to “B2” on prospects of deterioration in asset quality and profitability due to a rise in loan delinquencies and defaults.

The rating outlook has been changed to stable from rating under review. Today's rating action concludes the review for downgrade initiated on May 29, 2020, rating agency said in statement.

It also downgraded senior secured medium-term note (MTN) program from “B1” to “B2”.

The weakening will be driven by declining earnings and cash flow at its customers due to the deep coronavirus-led economic contraction.

Loans to small and medium-sized enterprises (SMEs), real estate developers and micro-finance companies--segments that represent about 40 per cent of its assets under management. These segments are at the greatest risk of a deterioration in asset quality, given the disruption to their business activities and their limited balance sheet liquidity. At the end of June 2020, about 50 per cent of these loans were subject to repayment moratoriums, compared to about 30 per cent for IIFL Finance's total loan book.

In line with its industry peers, Moody's expects IIFL Finance will restructure loans to borrowers whose businesses and earnings have been affected by the coronavirus outbreak.

The longer and deeper the hit to India's economic activity, the greater the negative financial impact on borrowers, leading to an increase in non-performing loans. However, the increase will be gradual as loan restructuring will prevent an immediate sharp increase in non-performing loans, Moody’s said.

IIFL Finance's profitability will also deteriorate as credit costs increase in line with the deterioration in asset quality.

While, IIFL Finance has increased loan loss provisions against potential asset quality deterioration, its provisioning coverage will deteriorate as non-performing loans (NPLs) increase.

IIFL Finance's return on assets has already deteriorated. It declined to about one per cent in June 2020 (annualised) from an average of 1.8 per cent in the past three years, excluding the one-time mark-to-market impact on foreign exchange borrowings.

IIFL Finance's capital remains stable as the company has slowed loan growth in response to the contraction in economic activity and to conserve liquidity.

IIFL Finance has not yet raised equity, unlike some of its peer non-bank finance companies (NBFCs), which have raised equity capital to shore up their buffers given the challenging operating conditions. While IIFL Finance is backed by strong shareholders, its access to equity capital remains to be tested, rating agency added.