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Moody’s Investors Service has downgraded Hero FinCorp Ltd’s foreign and local currency issuer ratings to ‘Ba1’ from ‘Baa3’.
The non-banking finance company’s (NBFC) outlook has been revised to negative from ratings under review, the global credit rating agency said in a statement.
Moody’s said its action reflects the impact on Hero FinCorp of the breadth and severity of the Covid-19 pandemic-related shock, and the deterioration in credit quality it has triggered.
The agency expects the NBFC’s asset quality and profitability to weaken as loan delinquencies and defaults increase, because customers and businesses face 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, it added.
From ‘Baa’ to ‘Ba’
As per Moody’s rating scale, debt obligations rated ‘Ba’ are judged to have speculative elements and are subject to substantial credit risk. Numerical modifier ‘1’ indicates that the obligation ranks at the higher end of its generic rating category.
Debt obligations rated ‘Baa’ are subject to moderate credit risk. These are considered medium-grade, and as such may possess speculative characteristics. Numerical modifier ‘3’ indicates a ranking in the lower end of its generic rating category.
The agency observed that while the Reserve Bank of India’s forbearance for banks and NBFCs ― whereby they can extend six-month loan repayment moratoriums to customers without affecting the asset classification ― will soften some of the near-term strains on asset quality, the sharp slowdown in India’s economic growth will still weigh on asset quality.
Capital: Hero FinCorp’s credit strength
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.
The NBFC has access to committed capital from its shareholders that is callable by the company before the end of the fiscal year ending March 2021, it added.
Despite the tight liquidity conditions for Indian NBFCs, Hero FinCorp has been able to refinance its maturing obligations.
As per Moody’s assessment, in the past year, the company has reduced its 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 (Hero MotoCorp Ltd), which helps it access banks and debt market investors for funding,” it said.
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