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New Delhi: Moody’s Investors Service on Thursday placed state-run firms REC Ltd (formerly Rural Electrification Corp.) and Power Finance Corp. Ltd (PFC) “on review for downgrade” after the Union government decided to sell its entire stake and transfer management control in REC to PFC.
This follows ICRA Ltd placing the long-term rating of AAA for the various debt programmes of REC and PFC “on watch” on Wednesday with developing implications. The rating agency reaffirmed its AAA rating to the short-term borrowing programmes of the two firms.
While Moody’s has placed “on review for downgrade the Baa3 issuer ratings” of PFC and REC, it also placed “on review for downgrade the (P) Baa3 foreign currency senior unsecured MTN program ratings and Baa3 foreign currency senior unsecured ratings of PFC and REC,” the agency said in a statement. Baa3 is the lowest investment grade.
Moody’s also placed on review for downgrade PFC’s and REC’s standalone credit profiles of Ba3.
“The domestic and foreign rating agencies have been concerned,” about the 6 December decision of the Cabinet Committee on Economic Affairs, said a government official, who did not wish to be named.
Moody’s said PFC and REC had total reported assets of ₹2.86 trillion and ₹2.46 trillion respectively, as of March.
The government’s move follows its plan to net about ₹14,000 crore in its disinvestment kitty with this proposed sale. The step also signals the creation of a major lending institution for India’s power sector and is expected to reduce competition, while leveraging synergies and achieving economies of scale, as REC and PFC are the biggest lenders in the sector.
India Ratings and Research said the “acquisition will increase the leverage of PFC and have an impact on PFC’s return on assets (2QFY19: 1.86%) and return on equity (14.29%); however, the positive liquidity buckets of PFC over October 2018-March 2019 will address the liquidity concerns”.
The “in principle” approval for the strategic sale of the government’s 52.63% of total paid-up equity shareholding in REC will take it closer to its ₹80,000 crore target of disinvestments this fiscal year and help it meet the fiscal deficit target of 3.3% of gross domestic product in 2018-19. So far, the government has garnered only ₹32,737 crore, following the collapse of plans to privatize Air India.
“The ratings for REC drew significant strength from its sovereign ownership and with the proposed acquisition by PFC, the management control and ownership would get transferred to PFC. Thus, PFC’s own credit profile would have a bearing on REC’s rating and PFC’s own capitalization profile is likely to get impacted post the proposed acquisition,” ICRA said on Wednesday.
“Further, incrementally, REC would also be dependent on PFC for raising external capital, if any, thus constraining the overall capitalisation profile for the two entities together. The modalities for the proposed acquisition are yet to be finalised, ICRA would be monitoring the events closely and would take suitable rating action once more clarity emerges,” ICRA said.
The transaction will have to be approved by the Competition Commission of India, the Securities and Exchange Board of India, the Reserve Bank of India, lenders, the boards of the two public sector units and minority shareholders. The government is also considering the sale of the Satluj Jal Vidhyut Nigam Ltd to NTPC Ltd.
“The acquisition intends to achieve integration across power chain, obtain better synergies, create economies of scale and have enhanced capability to support energy access and energy efficiency by improved capability to finance power sector. It may also allow for cheaper fundraising with increase in bargaining power for combined entity,” the government said in a note after CCEA’s move.