Anil Ambani. (Photographer: Qilai Shen/Bloomberg)

Will Reliance Home Finance Rating Cut Spell Fresh Trouble For Credit Markets?

A decision by CARE Ratings to downgrade the long-term ratings on some of the securities issued by two Anil Ambani group firms to ‘D’ or Default could hurt sentiment in an already fragile fundraising market for non-bank lenders.

On Friday, CARE Ratings downgraded Rs 4,980-crore in long-term debt of Reliance Home Finance Ltd. to D citing delays in servicing of bank debt. Also, Rs 200-crore worth of non-convertible debentures of Reliance Commercial Finance Ltd. were downgraded to D due to rescheduled payments and delays in servicing bank debt, the rating agency said.

The downgrades send a negative signal at a time risk appetite has been weak, said Karthik Srinivasan, group head for financial sector ratings at ICRA Ltd.

“Risk appetite in the market has been low and non-banking financial companies and housing finance companies have had to grapple with liquidity concerns over the past few months,” Srinivasan said. “While downgrades for Reliance Home Finance could send a negative signal, it is hard to determine the impact as several other factors, including the ongoing elections, are adding to market uncertainty,” he said.

One possible impact of downgrades faced by Reliance Home Finance and Reliance Commercial Finance could be that investors become even more selective about where they invest. This could lead to further trouble for non-bank lenders perceived to be weaker.

In an April 22 research report, Credit Suisse had noted that HDFC Ltd. and LIC Housing Finance Ltd. had accounted for a large chunk of the fundraising by non-bank lenders. Data compiled by the brokerage house showed that these two firms accounted for 60 percent of the bond issuance in February and March 2019, when fundraising activity picked up in the market.

Over the course of 2018-19, too, these two firms dominated the fundraising activity, showed the report.

The domestic wholesale debt market appears to be differentiating among NBFCs. Even as those perceived to be strong/backed by parent (HDFC, LIC Housing Finance, Bajaj Finance, M&M Financial Services) have been able to tap bond markets, issuances by the likes of Dewan Housing Finance, Indiabulls Housing Finance and Edelweiss have been minimal. 
Credit Suisse Report

Others took a different view.

Fixed income expert Ajay Manglunia said that the downgrade will have limited impact as the market was aware of the troubles being faced by some of these firms. “Even though, liquidity is currently an issue for the company, the scenario may improve in two months or so as if the company is able to complete its asset sales, said Manglunia.

Mahendra Kumar Jajoo, head of fixed income at Mirae Asset Management, agreed. “Market sentiment is already negative. So, on an incremental basis, the downgrades are not so much a concern for the market as they are not unexpected,” Jajoo said.

Even so, the continued troubles faced by non-bank lenders will keep financing rates high.

Despite two round of rate cuts from the Reserve Bank of India, funding costs for NBFCs remain elevated. “Since September 2018, spread for NBFC paper over corporate bond yields is 40-50 basis points higher for AAA-rated NBFCs, and 20 basis points higher for AA-rated NBFCs,” said Credit Suisse.

Will Reliance Home Finance Rating Cut Spell Fresh Trouble For Credit Markets?

Credit Suisse estimated that about Rs 1.3 lakh of NBFC borrowings from mutual funds will come due in the next three months. With the credit markets remaining difficult, NBFCs will have to rely on loan sell-down and bank lines of credit to raise funds.