The PFC-REC deal makes Power Finance Corp. the second largest state-owned financial firm by market capitalization after State Bank of India (SBI). (Reuters)
The PFC-REC deal makes Power Finance Corp. the second largest state-owned financial firm by market capitalization after State Bank of India (SBI). (Reuters)

REC deal makes PFC $80 billion lending behemoth

  • PFC pays 14,500 to the govt to buy a 52.63% stake in REC, in the process helping meet disinvestment and fiscal deficit targets
  • The PFC-REC merger deal, to be completed by next year, can potentially help in faster resolution of power sector NPAs

New Delhi: Power Finance Corp. Ltd (PFC) has completed the purchase of a controlling stake in state-run peer REC Ltd that will create an $80-billion lending giant by assets and potentially help in faster resolution of stressed assets in India’s power sector.

PFC paid 14,500 crore to the Union government to buy a 52.63% stake in REC, the company’s chairman and managing director Rajeev Sharma said on Thursday.

The proceeds from the REC stake sale have also helped the union government exceed its disinvestment target of 80,000 crore for the fiscal year 2018-19. The disinvestment receipts touched 85,000 crore last week.

PFC plans to complete the process of the merger with REC in the next fiscal year in consultation with the government. This would make PFC India’s second largest state-owned financial firm by market capitalization after State Bank of India (SBI).

While SBI commanded a market cap of 2.84 trillion on Thursday, REC and PFC achieved a market cap of 29,485.53 crore and 31,034.16 crore, respectively.

“PFC, therefore, will be a dominant player not only in the power sector but also in the entire financial market space," Sharma said.

PFC and REC had reported assets of 2.86 trillion ($43 billion) and 2.46 trillion ($37 billion), respectively, as of March-end, according to Moody’s Investors Service.

“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," Moody’s said in a statement on Wednesday.

Sharma said the consolidation will help in faster resolution of stressed assets, given PFC and REC have a robust presence in any consortium of lenders to power companies.

The PFC-REC deal comes against the backdrop of around 66 gigawatts of capacity facing various degrees of financial stress. Power sector NPAs comprise around 5.9% of the banking sector’s total outstanding advances of 4.73 trillion, according to Economic Survey 2016-17 released in August.

Sharma said the consolidation will help in raising funds at competitive costs and lead to convergence of lending policies and rates. It will also help in improving asset quality and impress upon state utilities to improve their performance.

“Currently, PFC and REC compete for resources both in domestic and international markets. A collaborative approach can lead to efficiencies in terms of timing and pricing and not competing in the same time or lenders space," he said.

The state distribution utilities, or power discoms, have been plagued by issues such as low collection, increase in power purchase cost, inadequate electricity tariff hike and subsidy disbursement, and increasing government department dues. This has resulted in discoms having poor payment records.

A group of ministers set up to evaluate the bill discounting proposal, wherein firms such as PFC make upfront payments to power generation utilities after discounting the receivables from discoms, could not find a solution to the vexed issue.

The PFC-REC deal has helped the government reach its fiscal deficit target of 3.4% of gross domestic product (GDP) in 2018-19. The budgeted fiscal deficit target was 3.3% of GDP at the beginning of 2018-19, which was later revised to 3.4%, while preparing the interim budget.

The shares of REC were bought at 139.50 apiece. While 70% of the deal was funded through cash flows, the rest was through debt. The government approved the transaction in December.

Moody’s has, meanwhile, retained the Baa3 issuer ratings of PFC and REC. It retained the previous stable outlook for the two lenders after placing them “on review for downgrade" in December. Baa3 is the lowest investment grade.

“I had informed that PFC will maintain its capital adequacy levels as per the RBI requirements and also to meet our future business growth. Let me reiterate that post the acquisition also, PFC will continue to be comfortable on capital," Sharma said.

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