Moody’s places REC, PFC on review for downgrade

New Delhi: On account of the Cabinet Committee's decision to sell the government stake in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC), Moody's Investors Service has put the two state-run companies "on review for downgrade."

Move comes day after ICRA downgrade

The move comes a day after ICRA, a rating agency, placed the long-term rating of AAA for the various debt programmes of REC and PFC "on watch" with developing implications. ICRA also reaffirmed the ICRA triple A to the short-term borrowing programmes of the two firms. "The ratings for REC drew significant strength from its sovereign ownership and with the proposed acquisition by PFC, the management control and ownership would get transferred to PFC. Thus, PFC's own credit profile would have a bearing on REC's rating and PFC's own capitalisation profile is likely to get impacted post the proposed acquisition," ICRA had said in a statement on December 12.

Moody's mulls Baa3 — the lowest investment grade — for PFC, REC

A statement released by Moody's said that while it has placed "on review for downgrade the Baa3 issuer ratings" of PFC and REC, it also placed "on review for downgrade the (P)Baa3 foreign currency senior unsecured MTN program ratings and Baa3 foreign currency senior unsecured ratings of PFC and REC." Baa3 is the lowest investment grade. In addition, Moody's has also placed on review for downgrade PFC and REC's standalone credit profiles of ba3.

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The deal

The proposal to sell the government stake in REC to PFC is part of the Finance Ministry's target to raise Rs 80,000 through disinvestment in the current fiscal. The government is expected to rake in Rs 14,000 crore through the proposed deal. At the end of March, PFC and REC had total reported assets of Rs2.86 trillion and Rs2.46 trillion, respectively, according to Moody's. The merged entity is expected to be a major lending institution in the power sector and could reduce competition, while leveraging synergies and achieving economies of scale, as REC and PFC are the biggest lenders in that space.

The transaction however is pending approval from the Competition Commission of India (CCI), the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), lenders, the boards of the two public sector units and minority shareholders. The government is also considering the sale of the Satluj Jal Vidhyut Nigam Ltd (SJVNL) to NTPC Ltd.

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