REC takeover to up PFC's leverage by Rs 15,000 cr: Ind-Ra

The proposed takeover of the government's 52.63 percent stake in Rural Electrification Corporation (REC) by Power Finance Corporation (PFC) is likely to stretch latter's balance sheet and increase its leverage by up to Rs 15,000 crore, India Ratings said.

The acquisition will impact PFC's return on assets and return on equity, the rating agency said, adding, however, the positive liquidity buckets of PFC over October 2018-March 2019 will address the liquidity concerns.

The Cabinet Committee on Economic Affairs on December 6 gave its in-principle approval for the strategic sale, post which REC is likely to continue to be a separate entity.

While the contours of the acquisition deal are being finalised by a group of ministers and secretaries, the agency said the leverage of PFC is likely to go up by Rs 14,000-15,000 crore to buy out the government's stake in REC.

"The acquired entity may breach the group/single borrowing limit with banks and may require diversification with regard to lenders/investors," the agency said.

The cash and cash equivalents in the balance sheets of PFC and REC were Rs 1,799 crore and Rs 22 lakh, respectively, in the first half of FY19.

The agency said the ratings of REC will be aligned with the rating of PFC.

"However, until the formalities of the acquisition are complete, it will continue to rate REC on the basis of the support it derives from the government as a public policy institution," it added.

The acquisition is aimed at achieving the integration of the power financing businesses of REC and PFC, while the disinvestment proceeds will boost the government's finances and help reduce the fiscal slippage in FY19.

Over FY14-FY18, the loan books of PFC and REC expanded at a CAGR of 10.22 percent and 12.66 percent to Rs 2.79 trillion and Rs 2.39 trillion, respectively, according to the agency.

At 1HFYE19, the loan books of both entities were dominated by power generation companies, though REC has a wider presence in the distribution segment than PFC.

"For REC and PFC, delinquent assets are arising only from their private sector exposure. A lower exposure to private sector lending has helped REC in maintaining better asset quality," it said.

Private sector lending accounted for 13 percent and 18 percent of the loan books of REC and PFC at April- September 2019, respectively, it said.