Fitch Publishes India Infoline's First-Time Rating of 'BB-'; Outlook Stable

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Fitch Publishes India Infoline's First-Time Rating of 'BB-'; Outlook Stable
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(The following statement was released by the rating agency) Fitch Ratings-Taipei/Shanghai-January 28: Fitch Ratings has published India Infoline Finance Limited's (IIFL) Long-Term Issuer Default Rating (IDR) of 'BB-'. The Outlook is Stable. Fitch has also assigned a 'BB-' rating to IIFL's USD1 billion medium-term note (MTN) programme. IIFL is a non-deposit accepting non-bank financial company (NBFC) in India that provides diversified credit facilities to individuals and companies that are underserved by banks. It operates under the flagship of IIFL Finance Limited (formerly IIFL Holdings (NS: IIFL ) Limited) and will become a listed entity after merging with IIFL Finance, pending regulatory approval. IIFL set up a senior secured MTN programme of USD1 billion in August 2019 and plans to issue US dollar notes under it. The notes issued under the programme are secured obligations of IIFL at all times ranking pari passu and without any preference among themselves. The notes will be secured with property that includes all present and future receivables/assets of the issuer, but excludes all fixed deposits and other assets notified by the issuer to the security trustee. The notes are also subject to maintenance based covenants that require IIFL and its principal subsidiaries to meet regulatory capital requirements and maintain net non-performing asset (NNPA) ratio equal to or less than 5% at all times. IIFL is also required to maintain the security coverage ratio at a level equal or greater to 1.0 at all times. The programme is listed on Singapore Exchange with the net proceeds of the notes to be used for on-lending and to support the company's business growth in accordance with the guidance of External Commercial Borrowings (ECB). The programme's rating reflects the ratings that are expected to be assigned to senior notes issued under the programme. Key Rating Drivers LONG-TERM IDR IIFL's Long-Term IDR is driven by its standalone credit profile. The rating is underpinned by IIFL's moderate franchise in India's NBFC sector and experienced management team, but is offset by its reliance on wholesale funding, appetite for high growth and tolerance for elevated leverage. The rating also takes into account our expectation of pressure on IIFL's asset quality and ongoing funding challenges, which has led the company to reduce its balance sheet and shift its funding structure. Fitch has a negative sector outlook on Indian NBFIs, reflecting the asset quality and funding challenges faced by the sector. Fitch regards the company's profile as its key rating driver. The company has moderate market positions in several niche segments, including affordable home, business and gold loans. It has been reducing its exposure to developer and construction finance. Its diversified product lines are offset by its small size that limits its pricing power and shorter operating record compared with that of higher-rated peers. IIFL, as a non-deposit accepting NBFC, is reliant on wholesale funding. In the wake of India's system-wide funding stress since September 2018, IIFL's funding sources have evolved towards longer-term funding and secured funding in the form of securitisation while reducing its reliance on short-term commercial paper. Developing an over-reliance on securitisation could reduce the company's financial flexibility and have a negative impact on the funding profile. The more challenging operating environment also weighed on the company's growth and financial performance for the first nine months of the financial year that ends March 2020, and we believe this will continue in the short term. The difficult funding conditions have led to a decline in IIFL's on-balance-sheet assets although in recent months loan growth has resumed. Profitability has, as a result, weakened from the previous years in light of the rising funding costs. We therefore expect full-year profit to be marginally weaker than the previous year. Gross impaired lending has been on the rise and was at 2.3% of loans at end-December 2019, reflecting the asset quality deterioration and a lower loan book. We expect asset quality to remain under pressure as the operating environment remains challenging, although IIFL has acceptable risk management, with asset-quality risk managed through conservative provisioning practices and an emphasis on collections. In addition, the company's aggressive plan in expanding retail loans could pressure its risk-management infrastructure and may lead to asset-quality issues. Leverage, measured by debt/tangible equity, came down to close to 5x by end-December 2019 due to the shrinking balance sheet, driven by tight market liquidity. Fitch estimates the leverage will increase to around 6x after a planned bond issuance on a pro forma basis and will rise further as loan growth resumes. The current leverage is below the 7x level that management can tolerate before considering additional equity. IIFL's core management team has around 20 years of financial sector experience with an acceptable degree of credibility and competence relative to its size and business nature. The founding shareholder is closely engaged in the business and has strong influence over the company's direction and strategy. However, Fitch believes key-man governance risk is counterbalanced by the presence of two key institutional shareholders. Execution has generally been in line with management's expectations, but its record is short compared with that of some larger peers. Senior Secured Debt The MTN programme is rated at the same level as IIFL's Long-Term IDR in accordance with Fitch's rating criteria. Most of IIFL's debt is secured and Fitch considers that non-payment of the company's senior secured debt would best reflect uncured failure. IIFL can issue unsecured debt in the overseas market, but such debt is likely to constitute a small portion of its funding and thus cannot be viewed as its primary financial obligation. RATING SENSITIVITIES LONG-TERM IDR Positive rating action could be triggered if the company strengthens its franchise and market positions on a sustained basis, combined with a longer record in its niche segments that leads to a significantly stronger company profile. In addition, leverage, measured by debt/tangible equity, would need to move towards 5x combined with a lower growth appetite and improving asset quality. Greater diversification and a lengthening of the funding profile on a sustained basis would also be positive for the rating. Negative rating action could be triggered by higher leverage towards 7x, a less diverse shorter-term funding structure or meaningfully increased reliance on secured debt against specific assets that reduces financial flexibility, and an increasing risk appetite as evidenced by aggressive expansion beyond Fitch's expectation and looser underwriting standards. A rapid deterioration in asset quality would also weigh on the rating, as would a weaker company franchise and market position. Senior Secured Debt The MTN rating will move in tandem with IIFL's Long-Term IDR. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit India Infoline Finance Limited; Long Term Issuer Default Rating; Publish; BB-; RO:Sta ----senior secured; Long Term Rating; New Rating; BB- Contacts: Primary Rating Analyst Katie Chen, Director +886 2 8175 7614 Fitch Australia Pty Ltd, Taiwan Branch Level 37 TAIPEI NANSHAN PLAZA, No. 100, Songren Road, Xinyi District Taipei 110 Secondary Rating Analyst Carol Liu, Associate Director +86 21 6898 8001 Committee Chairperson Mark Young, Managing Director +44 20 3530 1318

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