Moody’s downgrades IIFL Finance’s corporate family rating to B2 from B1

Moody’s Investor Service on Monday downgraded IIFL Finance’s 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 downgrade suggests that the rating agency expects the company’s asset quality and profitability to deteriorate as loan delinquencies and defaults increase.

The rating outlook has been changed to stable from rating under review. Data from Bloomberg show that IIFL Finance’s total loan fund as on March 2020 stood at Rs 27,274.5 crore. “Loans to small and medium-sized enterprises (SMEs), real estate developers and microfinance 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,” said Moody’s in its rating rationale.

In line with its industry peers, Moody’s expects IIFL Finance will restructure loans to borrowers whose businesses and earnings have been affected by Covid. The longer and deeper the hit to India’s economic activity, the greater the negative financial impact on borrowers, leading to an increase in non-performing loans. However, the increase will be gradual as loan restructuring will prevent an immediate sharp increase in non-performing loans.

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 capitalisation 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.

Given the stable outlook, IIFL Finance’s ratings are unlikely to be upgraded over the next 12-18 months, said the rating agency. Nevertheless, Moody’s could revise the rating outlook to positive if the company strengthens its liquidity by refinancing or raising new funding, strengths its loss-absorbing buffers by raising equity capital or if the operating environment improves, supporting strengthening of the asset quality.