Moody’s puts PFC and REC ratings ‘on review for downgrade’

Moody’s Investors Service on Thursday said it had placed the state-run firms — Power Finance Corporation (PFC) and Rural Electrification Corp (REC) — “on review for downgrade” after the government decided to sell its stake in REC to PFC.

Moody’s has also placed the (P)Baa3 foreign currency senior unsecured MTN programme ratings, “Baa3” foreign currency senior unsecured ratings and standalone credit profiles of “Baa3” of PFC and REC on review for downgrade.

The acquisition of government’s 52.6% stake in REC by PFC is credit negative for the latter, because it will materially weaken its consolidated capital ratios, said the report.

As both PFC and REC operate in the same business segment, negative impact from lower capital levels will outweigh any potential synergies, stated the report.

The review for downgrade of PFC’s standalone credit profile will focus on the extent of decline in the post transaction consolidated capital ratios of PFC.

Moody’s review will assess whether PFC will be required to make an open offer to REC’s minority investors and thus acquire a stake over 52.6%, price that PFC will have to pay to acquire this stake, including any premium that it would have to pay over and above REC’s prevailing market valuations, Moody’s said.

Moody’s will also focus on any actions by PFC to mitigate negative impact on its capital ratios, for example by raising new equity, though such measures are deemed to be unlikely. The impact of transaction on company’s liquidity profile, particularly its ability to raise sufficient funding to finance the transaction will also remain in focus.

The review for downgrade of REC’s standalone credit profile will focus on the impact of the transaction on the company’s liquidity profile, particularly its ability to manage its liquidity profile in the event that change of control clauses in some of its outstanding bonds trigger accelerated repayments, according to the report.

A downgrade of the companies’ standalone credit profiles will lead to downward pressure on their issuer ratings, it added.

Negative pressure on PFC’s ratings would translate into negative pressures on REC’s ratings, with PFC replacing the government as main controlling shareholder in REC.

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The review for both entities will also focus on any material and tangible evidence of operational synergies created by the transaction.