Moody's Investors Service has downgraded Indiabulls Housing Finance's long-term corporate family rating to Ba2 from Ba1.
Moody's has also downgraded the company's foreign-currency senior secured rating to Ba2 from Ba1, foreign and local currency senior secured MTN programme ratings to (P)Ba2 from (P)Ba1. The outlook has been changed to negative from stable.
The downgrade reflects renewed pressure on the cost and availability of funds for Indiabulls and certain other finance companies in India. This presents a more challenging external environment than Moody's had anticipated, it said.
The company's incremental cost of funding increased 45 basis points quarter-on-quarter ending June 2019, while the company's balance sheet declined by 7 per cent over the same period. This rise in funding costs was a key driver for the 28 basis points decline in spreads in the same period, although profitability remains comparatively strong relative to its peer group.
Liquid assets remain high at around 24 per cent of its balance sheet at end 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. At the same time, the firm's progress in improving the quality of its liquid assets has been slower than what was anticipated by Moody's.
The ratings also reflect the solid capital and profitability of the company, both of which remain relative credit strengths. Capital levels have been strengthening, driven by a decline in the size of the balance sheet and relatively high retained earnings.
The company had announced a plan in April to merge with Lakshmi Vilas Bank, a small bank in India, and thus get converted into a bank. This merger proposal is now awaiting regulatory approval from Reserve Bank of India. If approved and consummated, it will be a significant credit positive event for the company.
The outlook has been changed to negative to reflect the possibility that the tight funding conditions may persist for some time, which could further pressure other aspects of Indiabulls' credit profile such as profitability and asset quality.
"Since the rating is on a negative outlook, we do not expect the rating to go up over the next 12 to 18 months," said Moodys. "The outlook could be changed to stable if the company is able to demonstrate improved access to funding. The company's ability to sustain normal loan growth, achieve competitive funding costs and access funding from institutional investors will provide indications of progress on this front."
Headquartered in New Delhi, Indiabulls Housing Finance has total assets of Rs 1.2 lakh crore.
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