Contrary to an earlier plan to fund its acquisition of the Centre’s 52.63% stake in Rural Electrification Corporation (REC) mainly through borrowings, state-run Power Finance Corporation (PFC) will likely draw Rs 10,000 crore from its ‘reserves and surplus’ to carry out the Rs 14,000-crore purchase. The deal will materialise later this month, making a major contribution to the Centre’s disinvestment kitty for the year. Sources said the acquisition is likely to be debt-funded by only to the tune of Rs 4,000 crore.
Last year, a similar PSU-PSU deal where ONGC acquired the Centre’s 51% stake in HPCL had a large component of debt funding; while the transaction was worth Rs 37,000 crore, the state-run explorer resorted to debt to raise some Rs 25,000 crore.
The sources added that despite spending such a large sum, PFC won’t get the tag of the promoter of REC and the government would continue to hold the status to avoid a possible backlash from its overseas bonds holders, who could demand higher yields on these instruments if the sovereign backing is diluted. Bond issuances by state-run firms overseas have a clause that investors will be compensated if the government of India’s shareholding in these companies go below 50%.
Incidentally, ONGC has also not been named as the promoter of oil marketer HPCL so far. Backed by the law ministry, the petroleum ministry has now asked HPCL to recognise ONGC as its promoter and put the same on record with the stock exchanges.
Use of reserves, however, could constrain PFC’s lending ability to the power sector if additional capital is not infused into the company. Between REC and PFC, they lend a considerable Rs 1,50,000 crore/annum to the power sector. “This is likely to come down to Rs 80,000 crore or thereabouts,” an official familiar with the matter said.
The acquisition will also restrict the leeway of lenders such as LIC or banks or mutual funds to invest in these firms – the lending threshold in a group company (PFC) will be breached much faster than in these as independent companies.
Critics of the deal had flagged three consequences of the deal — a possible rating downgrade, capital erosion and worsening of debt-equity ratios depending on the structure of the deal.
Global rating agency Moody’s will ‘review for downgrade’ of PFC’s standalone credit profile by focusing on the extent of decline in the post-transaction consolidated capital ratios of PFC. In Icra’s opinion, the proposed acquisition by PFC is likely to impact its capitalisation profile adversely as the firm would have to knock off its proposed investments in REC from its net owned funds, for capital adequacy calculations.
PFC will likely use general reserves and surplus funds – totaling `13,428 crore parked in fixed deposits as on March 31, 2018 – for the transaction. Its total reserves and surplus were `37,221 crore.
As on March 31, 2018, PFC’s Tier I Capital to Risk Assets Ratio (CRAR) was 16.98% (this fell to 14.9% as on September 30, 2018) against regulatory requirement of a minimum 10% while its overall CRAR was 19.99% (this has since declined to 17.91%) against 15% required.
Depending upon the amount of investment and portfolio growth in H2FY19, the Tier I % for PFC could come under further pressure, Icra said in a note. However, it is likely to remain above the regulatory threshold of 10%. PFC had a Tier I capital of `36,477 crore as on March 31, 2018, against risk weighted assets of `2,14,881 crore. A `10,000-crore reduction would bring down the Tier I CRAR to around 12% from the March 31, 2018, level.
Additionally, if the acquisition is mostly debt-funded, the gearing levels for PFC would also increase from current levels of 6.4 times as on September 30, 2018, to around 8 times in the near term, Icra said. Rise in the gearing level would result in the need for capital infusion by the government, which it might not want to do at this juncture.
In FY18, PFC reported a net profit of `5,855 crore against `2,126 crore in FY17. As on September 30, 2018, PFC had a total loan book of `2,92,648 crore. In FY18, REC reported a net profit of `4,647 crore on an asset base of `2,46,484 crore against profit of `6,246 crore on an asset base of `2,09,236 crore in FY17.