PSUs face credit risk from share buybacks, warns S&P

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Updated: Jan 30, 2019 6:57 AM

As per S&P, the credit impact on the respective companies can vary depending on the size of cash outflow.

As per S&P, the credit impact on the respective companies can vary depending on the size of cash outflow.

The Centre’s bid to boost its non-debt capital receipts by pushing the cash-rich central PSUs to buy back their own shares has impacted the credit profile of these firms.

S&P Global Ratings said on Tuesday that corporate activities that are designed to support the government coffers by PSUs are ‘credit negative’ for such entities.

In the past three months, 10 PSUs have announced or executed buybacks for a cumulative amount of `15,000 crore, which will count toward the government’s target of `80,000 crore from disinvestment of state-owned entities. As FE reported earlier, buybacks and liberal dividends have depleted central PSUs’ surplus cash from `2.64 lakh crore in FY14 to `1.95 lakh crore in FY17 and further to `1.7 lakh crore in FY18. CARE Ratings said in a report on Tuesday that in all years from FY15 to FY19, off-budget allocation of capital expenditure via internal and external budgetary resources (funds raised by central PSUs by way of profits, loans and equity among others) has been higher than the budget allocation of capital expenditure.

In fact, the PSUs are also being made to invest in the government’s assorted schemes and programmes.
Funds raised by the CPSEs through external sources like bonds/debentures, ECBs and suppliers credit (excluding internal profits and others) which are essentially the off-budget amount available by the government to fund capex rose from `1.49 lakh crore in FY16 to `2.02 lakh crore in FY17 to `2.17 lakh crore in FY18, according to CARE Ratings.
As per S&P, the credit impact on the respective companies can vary depending on the size of cash outflow.

“Extracting cash from SOEs (PSUs) decreases their financial flexibility in a stress scenario, which — at least over the short term — is credit negative at the firm level,” S&P said. “While we await the final acquisition cost, PFC’s leveraged buyout of the government’s 52% shareholding in REC led us to place the rating on CreditWatch with negative implications. Although we don’t expect a change in government support for PFC, if the government were to reduce its shareholding, this would trigger a review our rating on PFC with pressure likely to the downside,” S&P said.

It added while extraction of existing excess capital in the form of dividends generally has an impact only on the short-term business of these firms as dividends are discretionary and can be scaled back if future profitability is low. “In contrast, we believe that debt-funded share buybacks, mergers or acquisitions have longer-term implications. Further, reduced government linkages to divested firms may lower the likelihood of government support in a stress scenario,” S&P said.

(With PTI inputs)

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