Moody’s downgraded the corporate family (CFR) rating of IIFL Finance Ltd and guaranteed debt from “B1” to “B2” due to the prospect of deteriorating asset quality and profitability due to ‘an increase in payment defaults and payment defaults.
The rating outlook has changed from the rating under review to stable. Today’s rating action concludes the downgrade review launched on May 29, 2020, the rating agency said in a statement.
It also downgraded the rating of the senior secured medium-term note (MTN) program from “B1” to “B2”.
The weakening will be due to the decline in profits and cash flow for its customers due to the deep economic contraction caused by the coronaviruses.
Loans to small and medium-sized enterprises (SMEs), real estate developers and microfinance companies, segments that represent around 40 percent of its assets under management. These segments are the most exposed to a deterioration in the quality of assets, given the disruption of their activities and the limited liquidity of their balance sheets. At the end of June 2020, around 50% of these loans were subject to repayment moratoriums, compared to around 30% for IIFL Finance’s total loan portfolio.
In line with its industry peers, Moody’s expects IIFL Finance to restructure lending to borrowers whose businesses and revenues have been affected by the coronavirus outbreak.
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The longer and deeper the blow to India’s economic activity, the greater the negative financial impact on borrowers, leading to an increase in NPLs. However, the increase will be gradual as loan restructuring will prevent an immediate large increase in non-performing loans, Moody’s said.
The profitability of IIFL Finance will also deteriorate as the cost of credit increases along with the deterioration in asset quality.
Although IIFL Finance has increased provisions for loan losses against potential deterioration in asset quality, its provisioning coverage will deteriorate as non-performing loans (NPLs) increase.
The return on IIFL Finance’s assets has already deteriorated. It fell to around 1% in June 2020 (annualized), compared to an average of 1.8% over the past three years, excluding the one-time mark-to-market impact on foreign currency 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 yet to raise equity, unlike some of its non-bank finance companies (NBFCs), which have raised equity to bolster their reserves given the difficult operating conditions. Although IIFL Finance is backed by strong shareholders, its access to equity remains to be tested, the rating agency added.