A downgrade for PFC, which will have a controlling stake in REC post the deal, will in turn mean a downgrade for REC as well.
While the Competition Commission of India on Tuesday approved the acquisition of 52.63% stake in REC by Power Finance Corporation (PFC), the credit profile of PFC faces imminent downgrade by ratings agencies such as Moody’s as it is likely to pay a premium for REC and is likely to borrow Rs 15,000 crore to fund the deal. A downgrade for PFC, which will have a controlling stake in REC post the deal, will in turn mean a downgrade for REC as well. The Cabinet Committee on Economic Affairs and the board of PFC gave in-principle approval for the strategic sale in December 2018 with an aim that the deal will bring in better synergies and create economies of scale. “It may also allow for cheaper fundraising with increase in bargaining power for the combined entity,” the government had said then.
However, Moody’s in a recent report had said the deal will be credit negative for PFC as “it will materially weaken its capital ratios”. The ratings agency has placed credit profiles, issuer ratings and borrowings of both PFC and REC “on review for downgrade”.
PFC’s cash surplus fell to Rs 553 crore by the end of FY18 from Rs 3,573 crore at end-FY17 after the firm paid dividends and issued bonus shares in the ratio of 1:1. This effectively means that it will borrow almost the entire amount to fund the deal.