State-run Power Finance Corporation (PFC) plans to fund acquisition of the Centre's 52.63 percent stake in REC (erstwhile Rural Electrification Corporation) by sourcing Rs 10,000 crore from its personal reserves and surplus for the Rs 14,000 crore deal. The takeover, which was earlier going to be funded mainly through borrowings, will be made public later this month, The Financial Express reported.
Self-funding a major portion of the deal may take a toll on PFC's lending ability in the power sector unless extra capital is provided to the company. REC and PFC lends a sizeable Rs 1.5 lakh crore per annum to the sector, which may fall to Rs 80,000 crore, a source told the newspaper.
PFC may use general funds worth Rs 13,428 crore parked in its fixed deposits as on March 31, 2018 for the transaction. The company's total reserves stood at Rs 37,221 crore.
A similar deal between Oil and Natural Gas Corporation (ONGC) and Hindustan Petroleum Corporation (HPCL) in 2018 was supported by debt-funding. Of the total Rs 37,000 crore, ONGC resorted to borrowing Rs 25,000 crore.
PFC will not be called the promoter of REC, as that tag will be retained by the government. Even ONGC is not called the promoter of HPCL yet. This is because the government needs to placate overseas bondholders who might demand higher yields on these instruments if government backing is thinned. Overseas investors in the bonds of state-run firms are supposed to get compensated if the government's shareholding in these companies goes below 50 percent.
After the acquisition, lenders to PFC and REC like LIC, mutual funds or other banks may be restricted from investing in these firms. Experts said the deal may lead to a possible rating downgrade, capital erosion and worsening of debt-equity ratios based on the structure of the deal.
Moody's had said it would review PFC's rating for a downgrade by focusing on the extent of decline in its consolidated capital ratios after the deal. Ratings agency ICRA said this deal will impact the capitalisation profile of PFC negatively.
PFC reported a net profit of Rs 5,855 crore in FY18 as against Rs 2,126 crore in FY17. As of September 2018, the company had a total loan book of Rs 2,92,648 crore. In FY18, REC posted a net profit of Rs 4,647 crore.