Moody's Investors Service has downgraded IIFL Finance Limited's ("IIFL Finance") corporate family rating (CFR) to B2 from B1, senior secured debt rating to B2 from B1, and senior secured medium-term note (MTN) program rating to (P)B2 from (P)B1.
The rating outlook has been changed to stable from rating under review.
Today's rating action concludes the review for downgrade initiated on 29 May 2020.
The downgrade of IIFL Finance's ratings reflects Moody's expectation that the company's asset quality and profitability will deteriorate as loan delinquencies and defaults increase. This 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% of its assets under management - 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% of these loans were subject to repayment moratoriums, compared to about 30% 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 nonperforming loans. However, the increase will be gradual as loan restructuring will prevent an immediate sharp increase in non-performing loans.
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, Moody's expects its provisioning coverage will deteriorate as NPLs increase. IIFL Finance's return on assets has already deteriorated, declining to about 1.0% in June 2020 (annualized) from an average of 1.8% 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 nonbank 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.
While IIFL Finance's funding remains stable, funding conditions remain challenging for Indian NBFCs. In particular, non-bank debt markets remain largely closed to many NBFCs given the risk aversion prevalent in Indian financial markets.
As a result, IIFL Finance remains reliant on public sector banks as the primary source of liquidity to repay maturing obligations. Loan securitizations and assignments, which were a key source of funding in the past 12-18 months, have slowed given increased risk aversion amongst banks given the bleak asset quality outlook. In addition, IIFL Finance's modest liquidity provides limited buffer should funding conditions suddenly tighten.
The stable outlook reflects Moody's expectation that IIFL Finance will continue to perform in line with that of its B2 CFR peers over the next 12-18 months, with its stable capitalization providing resilience against weakening profitability and asset risk. In addition, Moody's expects ongoing deleveraging due to lower originations to result in reduced refinancing needs.
Shares of IIFL Finance Limited was last trading in BSE at Rs.80.3 as compared to the previous close of Rs. 79.55. The total number of shares traded during the day was 12351 in over 297 trades.
The stock hit an intraday high of Rs. 81.55 and intraday low of 79.8. The net turnover during the day was Rs. 997993.