Moody's extends review for downgrade on Hero FinCorp's Baa3 rating

Rating agency Moody's has extended its review for downgrade on Hero FinCorp Ltd’s (HFL) Baa3 local and foreign currency issuer ratings.

It did the rating review on April 13, 2020. The expectation was that the company's asset quality will deteriorate on the back of rising loan delinquencies and defaults.

Some customers and businesses will struggle with payments as earnings decline due to the economic disruption of the coronavirus outbreak, said the rating agency. Hero FinCorp, a Delhi-based finance company, reported total assets of Rs 25,600 crore at the end of March 2020.

Moody's said it will review the rating once it has information on the impact of the economic disruption pandemic on HFL’s loan collections and asset quality.

It will also review the company's access to funding and its ability to preserve liquidity over the next 12-18 months. Given the review for downgrade, an upgrade is unlikely in the near term.

The Reserve Bank of India's (RBI) loan repayment moratorium will help borrowers without affecting Hero FinCorp's asset quality classifications. But, the company's liquidity will come under strain as loan collections decline.

Profitability will also deteriorate because of lower revenues, higher credit charges, and higher cost-to-income ratios as business activity declines. Despite these issues, the company's capitalisation will remain a key credit strength.

The ratings could be confirmed if the company's asset quality and profitability remain stable over the next few quarters. A substantial capital raise that improves the company's loss-absorbing buffer could also result in a confirmation of the ratings.

Hero FinCorp's Baa3 rating is three notches higher than its standalone assessment of ba3. It reflects Moody's assumption of a very high likelihood of support from its key shareholder, Hero MotoCorp Ltd, in times of need.

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