Fitch affirms Housing and Urban Development Corporation at 'BBB-'; Outlook Negative; Stock up 1%

8 Mar 2022 , 11:01 AM

Fitch Ratings has affirmed Housing and Urban Development Corporation Limited’s (HUDCO) long-term Foreign and Local Currency Issuer Default Ratings at ‘BBB-. The Outlook is Negative, reflecting the Outlook on the Indian sovereign rating (BBB-/Negative). The rating on HUDCO’s Rs50 billion medium-term note (MTN) programme has also been affirmed at ‘BBB-.

The company informed the exchanges that HUDCO is a policy institution that provides financing for housing and non-commercial urban infrastructure. It is regulated by the National Housing Bank (NHB) and Reserve Bank of India and is under the administrative control of the Ministry of Housing and Urban Affairs (MOHUA). The company’s key mission is to support the construction of affordable housing for lower-income households and the development of non-commercial urban infrastructure.

At around 11.05 am, Housing & Urban Development Corporation Ltd was trading at Rs33.55 per piece up by Rs0.4 or 1.21% from its previous closing of Rs33.15 per piece on the BSE.

Key Rating Drivers
‘Strong’ Status, Ownership and Control: The central government’s ownership and control of HUDCO reinforces Fitch’s expectations that extraordinary support would be extended to the company, if needed. Fitch expects the government will maintain a sufficiently high majority stake and thus control of HUDCO. The government owns 81.81% of HUDCO after divesting 8% in 2021. The divestment was part of government’s plan since 2019.

HUDCO is established as a limited liability company. The government’s control is exercised via control of the board, which includes three MOHUA-appointed government nominees. HUDCO also enters into an annual agreement with the MOHUA that sets out its operational and financial performance targets, which are reviewed quarterly.

‘Very Strong’ Support Record: Fitch believes the government’s support for HUDCO’s policy role is evident from HUDCO’s access to low-cost funding, regulatory flexibility and financial stability. The support includes: access to tax-free bonds, which accounted for 28% of HUDCO’s total debt in the financial year ended March 2021 (FY21); guaranteed foreign-currency debt from multilateral institutions; issuance of fully serviced government bonds (33% of total debt outstanding); and waivers on guarantee fees applicable on debt.

The NHB allows HUDCO to have higher loan exposure to government agencies than other housing-finance companies. Lending to the government and its agencies can make up 50% (individual) and 100% (group) of HUDCO’s net owned funds, against limits of 15% and 25%, respectively, for other housing-finance companies. Consequently, government-related projects dominate 97% of its loan portfolio. Government guarantees on agency project loans, which help HUDCO maintain favourable asset quality, are 88% of the total loan portfolio.

‘Very Strong’ Socio-Political Implications of Default: HUDCO plays an important role in supporting the government’s affordable housing policies. HUDCO provides financing, such as viability-gap funding with long repayment duration, and appraises projects, promotes scheme details, monitors site inspections and organises awareness programmes. Affordable housing is a high priority programme reflected in the government housing for all programmes. The company has funded almost 20 million dwelling units, of which 86% belong to India’s lower-income population.

Fitch does not believe HUDCO could be easily substituted, as it is the sole policy entity for financing affordable housing projects. A default would therefore disrupt the availability of affordable housing and the government’s urban infrastructure development.

“Very Strong’ Financial Implications of Default: HUDCO reported total loan assets of Rs742.9 billion in FY21, of which around 97% were to government agencies borrower. The government also controls and monitors HUDCO’s borrowing and target of cost of fund via Memorandum of Understanding with the government. In addition, issuance of tax-free bonds and government fully serviced bonds are also directed and approved by the government. Therefore, Fitch regards HUDCO as a proxy funding vehicle for the MOHUA to finance the state’s high-priority programmes by allocating housing subsidies. Its default would limit the government’s borrowing and refinancing capacity and damage investor sentiment towards the sovereign, other government-related entities and the affordable-housing and urban-infrastructure sector.

Covid-19 Pandemic Reduced Activity: HUDCO’s net profit fell by 8% in FY21 to Rs15.7 billion on a slowdown in economic activity and government containment policy during the pandemic. Consequently, HUDCO’s loan asset was flat in FY21 at Rs742.9 billion, influenced by a lower new sanction and disbursement during the period. However, asset quality was maintained with net non-performing loans at 0.5% (gross: 4.0%), against 0.2% (gross: 3.8%) in 2020.

Funding Access Supports Liquidity: HUDCO’s well-spread debt maturities are concentrated in the next one to three years and seven to 10 years. We believe HUDCO’s capital-market access and bank relationships mitigate refinancing risk. Its tax-free and fully serviced government bonds have attracted a broad range of investors. The company also has limited interest rate and currency risk, as most of its debt is issued in Indian rupees at fixed rates. Access to INR87 billion of unused cash credit and bank overdraft facilities as of FY21 also supports liquidity.