Moody's Investors Service on Friday downgraded Hero FinCorp's foreign and local currency issuer ratings to Ba1 from Baa3, citing that the coronavirus outbreak would impact its credit quality. The non-banking finance company's (NBFC) outlook has also revised to negative from ratings under review.
Given the negative outlook, an upgrade is unlikely in the near term, said Moody's, adding that it could return to stable if the company 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.
The American rating agency expects the company's profitability and asset quality to stabilise beyond fiscal year ending March 2021.
"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," Moody's said.
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, it added.
According to Moody's, 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. It expects Indian non-bank finance companies to be affected by the shock given the extensive disruptions to India's economic activity.
"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," the agency said.
The rating action has also taken into account a very high degree of support from its parent, Hero MotoCorp Limited (HMCL). Hero FinCorp, engaged in consumer finance businesses and commercial lending, is a subsidiary of Hero MotoCorp.
Moody's expects Hero FinCorp's capital to remain largely stable as the company looks to conserve liquidity and avoid expanding its balance sheet until economic conditions normalise. 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," Moody's said.
By Chitranjan Kumar