Rating Action: Moody's downgrades Hero FinCorp Limited's ratings with a negative outlook
Global Credit Research - 24 Jul 2020
Singapore, July 24, 2020 -- Moody's Investors Service has today downgraded Hero FinCorp Limited's foreign and local currency issuer ratings to Ba1 from Baa3.
Today's rating action concludes the review for downgrade initiated on 13 April 2020.
The outlook has been revised to negative from ratings under review.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. Moody's expects Indian non-bank finance companies (NBFCs) to be affected by the shock given the extensive disruptions to India's economic activity.
Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety. Today's action reflects the impact on Hero FinCorp of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.
Moody's expects Hero FinCorp's asset quality and profitability to weaken as loan delinquencies and defaults increase, because customers and businesses face a drop in earnings and cash flows due to the economic disruptions caused by the coronavirus outbreak. Hero FinCorp's unseasoned loan book also poses risks to asset quality, given its limited operating track record and rapid growth in the past few years.
While the Reserve Bank of India's forbearance for banks and NBFCs -- whereby they can extend 6-month loan repayment moratoriums to customers without affecting the asset classification -- will soften some of the near-term strain on asset quality, the sharp slowdown in India's economic growth will still weigh on asset quality.
Capital is a credit strength of Hero FinCorp, supported by capital infusions from its shareholders. Moody's expects Hero FinCorp's capital will remain largely stable as the company looks to conserve liquidity and avoid expanding its balance sheet until economic conditions normalize. Hero FinCorp has access to committed capital from its shareholders that is callable by the company before the end of the fiscal year ending March 2021.
Despite the tight liquidity conditions for Indian NBFCs, Hero FinCorp has been able to refinance its maturing obligations. In the past year, the company has reduced dependence on short-term financing, however, its modest liquidity buffers have left it exposed to volatile refinancing conditions. That said, these weaknesses are somewhat offset by the company's strong links with its parent, which helps it access banks and debt market investors for funding.
The rating action also takes into account a very high degree of support from its parent, Hero MotoCorp Limited (HMCL).
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING UP
Given the negative outlook, an upgrade is unlikely in the near term.
The outlook could return to stable if Hero FinCorp is able to absorb the impact of the asset quality deterioration and higher credit costs in the current fiscal year without materially impacting its capital position, and we expect the company's profitability and asset quality to stabilize beyond fiscal year ending March 2021.
WHAT COULD CHANGE THE RATING DOWN
Moody's could downgrade the ratings if there is a material deterioration in the company's asset quality that pressures its profitability, beyond what is incorporated in today's rating action. Moody's could also downgrade the ratings if Hero FinCorp's funding and liquidity profiles deteriorate.
Any change to Moody's expectation of support from HMCL will also pressure on Hero FinCorp's ratings.
The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in New Delhi, Hero FinCorp Limited reported total assets of INR 256 billion at 31 March 2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Alka Anbarasu VP - Senior Credit Officer Financial Institutions Group Moody's Investors Service Singapore Pte. Ltd. 50 Raffles Place #23-06 Singapore Land Tower Singapore 48623 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Graeme Knowd MD - Banking Financial Institutions Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Singapore Pte. Ltd. 50 Raffles Place #23-06 Singapore Land Tower Singapore 48623 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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