MUMBAI, Mar 27: Global rating agency Moody’s
Wednesday confirmed Baa3 ratings and retained stable outlook
of Power Finance Corporation (PFC) and REC Ltd on expectation
the deal between the two companies will conclude soon.
Last week, state-owned PFC had said it will acquire
the entire 52.63 percent shares of the government in REC for
Rs 14,500 crore by the month-end.
The rating agency has confirmed the Baa3 issuer
ratings of PFC and REC.
“With all necessary approvals in place, we expect this
transaction to conclude in the near term, possibly before the
end of March 2019,” Moody’s said in a note.
The ratings of the two companies were put under review
on December 13, 2018, following the announcement that PFC will
acquire the government’s stake in REC.
The acquisition will weaken PFC’s capital levels as it
is buying the government’s stake in REC without raising any
equity.
It, however, said the internal capital generation
during the next two years will help to partially rebuild the
company’s capital.
The expectation of sufficient profitability to allow
for some rebuilding of capital is based on assumption that PFC
and REC have now classified the bulk of their stressed loans
as stage 3 loans.
While some increase in coverage levels may be
required, profitability will remain a key credit strength for
the two companies, it said.
“As the resolutions of some of the stressed loans come
through, it will boost profitability as the proportion of
interest-earning assets will increase,” it said.
The report 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.
The rating agency said it 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 Baseline Credit
Assessment (BCA).
While REC will no longer be directly owned by the
government, the government will continue to exercise
control over it through PFC, it said.
“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.
“We expect REC will continue to receive extraordinary
government support when needed, although such support will
flow through its parent PFC,” the report said. (PTI)
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