Moody’s retains stable outlook on PFC, REC post acquisition announcement


Global rating agency Moody’s Investors Service on Wednesday said it has retained the previous stable outlook on Power Finance CorporationNSE -0.38 % (PFC) and REC Limited, as it expects quick closure of a deal between the two firms and resolution of a chunk of their bad loans. Borrowing programmes of the two firms were put under watch by rating firms post announcement of the acquisition.

Power Finance Corp last week announced a deal value of Rs 14,500 crore to acquire government’s stake in REC. The rating could improve if there is a substantial improvement in the companies’ capital and liquidity. However, the two organisations face downgrade risk there is a substantial improvement deteriorating financial position of state-run power utilities, a statement issued by the credit rating firm said.

“With all necessary approvals in place, Moody’s expects this transaction to conclude in the near term, possibly before the end of March 2019. This acquisition will weaken PFC’s capital levels as it is buying the government’s stake in REC without raising any equity. However, Moody’s estimates that internal capital generation during the next two years will help to partially rebuild the company’s capital,” the statement said.

This expectation of sufficient profitability to allow for some rebuilding of capital is based on the assumption that PFC and REC have reclassified bulk of their stressed loans. As the resolutions of some of the stressed loans come through, it will boost profitability as the proportion of interest-earning assets will increase.

Moody’s confirmed baseline credit assessment of ba3 on PFC. It said PFC’s assessment and REC’s standalone credit profile could be downgraded if –financial strength of the state-run power utilities deteriorates significantly; the company’s asset-liability mismatch deteriorates; and the asset quality problems in the company’s loans to the private sector exacerbate.

The assessment could be upgraded if there is a substantial improvement in its capital and liquidity. REC’s standalone credit profile could be upgraded if there is a substantial improvement in its liquidity.

Moody’s said PFC’s strategic importance to the government will further increase upon completion of the acquisition, as the combined entity will become the biggest non-bank finance entity in which the government holds a controlling stake.

In addition, it will account for the majority of financing for state power utilities. State power utilities in turn still account for a material portion of power generation capacity in India.

As such, Moody’s continues to build in a high level of extraordinary support from the government, leading to the confirmation of the PFC’s final rating at Baa3 by incorporating a three notch uplift to its BCA.REC’s standalone credit profile of ba3 is at the same level as its previous BCA of ba3, as its key credit metrics will remain unaffected by this deal.

In particular, there will not be any impact on its liquidity as the company has been able to reach an agreement with bond holders to avoid triggering accelerated repayments following the change in its management control.

While REC will no longer be directly owned by the government, the government will continue to exercisecontrol over it through PFC. It remains strategically important to the power sector and its role in implementing key central government policy initiatives in the power sector will remain unchanged.

The rating action concludes the review of the ratings of the two companies, initiated on December 13 2018 following the announcement that PFC will acquire the government’s stake in REC.