Moody's Investors Service has placed on review for downgrade the Baa3 issuer ratings of Power Finance Corporation Limited (PFC) and REC Limited (REC) after government last week grant an 'in principle' approval for PFC acquisition of the government's entire 52.6% stake in REC.
"Moody's has 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," said a Moody's statement adding that it has also placed on review for downgrade PFC and REC's standalone credit profiles of Baa3.
Upon completion of the transaction REC will become a subsidiary of PFC.
The acquisition by PFC of the government's stake in REC is credit negative for PFC, because it will materially weaken its consolidated capital ratios, said Moody's.
While the transaction could also create some operational synergies, as both PFC and REC operate in the same business segment, Moody's believes that the negative impact from lower capital levels will outweigh any potential synergies.
The review for downgrade of PFC's standalone credit profile will focus on the extent of decline in the post transaction consolidated capital ratios of PFC.
Specifically, Moody's review will assess whether PFC will be required to make an open offer to minority investors in REC, and thus acquire a stake greater than just the 52.6% government stake.
Secondly, the price that PFC will have to pay to acquire this stake, including any premium that it would have to pay over and above REC's prevailing market valuations.
Moody’s will also assess any actions by PFC to mitigate the negative impact on its capital ratios and the impact of the transaction on the company's liquidity profile, particularly its ability to raise sufficient funding to finance the transaction.
The review for downgrade of REC's standalone credit profile will focus on the impact of the transaction on the company's liquidity profile, particularly its ability to manage its liquidity profile in the event that change of control clauses in some of its outstanding bonds trigger accelerated repayments, said Moody's statement.
