Moody's Investors Service has downgraded the corporate family rating (CFR) and the foreign-currency senior secured rating of Indiabulls Housing Finance Limited
(Indiabulls) to B2 from Ba2.
In addition, Moody's has downgraded Indiabulls' foreign and local currency senior secured MTN program ratings to (P)B2 from (P)Ba2.
The outlook on all ratings, where applicable, remains negative.
The downgrade is driven by Indiabulls' ongoing challenging access to funding. Governance considerations were also a key driver of this rating action.
The company's access to funding remains challenging. The continued decline in on-balance sheet loans is a reflection of its funding challenges.
While access to funding remains challenging, its pool of liquid assets, the ability to run down the loan book and rollover 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.
Governance considerations were also a key driver of this rating action. Perceptions of weak governance have an impact on the credit profile by impeding access to funding. This is particularly so in the current context as there has been an increase in lenders' risk aversion towards Indian finance companies following the default of IL&FS on September 2018.
The proposed merger with Lakshmi Vilas Bank would have provided a vote of confidence in governance, as it would have meant that the company passed the regulator's fit and proper criteria for becoming a bank. Hence, the rejection by the Reserve Bank of India of this proposal on 9 October is a credit negative.
The ratings also factor in the high capital of the company. We expect 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.
What could change the rating up
As the ratings have a negative outlook, Moody's does not expect the ratings to be upgraded.
The ratings could be affirmed at their current level if Indiabulls is able to demonstrate improved access to funding.
What could change the rating down
The ratings could be downgraded if Indiabulls' access to bank funding or liquidity deteriorates.
The ratings could also be downgraded if there is a meaningful deterioration in asset quality.