With credit rating firms assessing the impact of the mega PFC-REC merger on the companies’ credit profile, plans laid out by state-run power distributing companies’ (discoms) may come unstuck in the absence of adequate funding. Having been saddled with a ‘credit watch’ put on them by several ratings firms, both Power Finance Corporation (PFC) and REC (erstwhile Rural Electrification Corporation) have put the brakes on disbursements and sanctions for new projects, said officials.

The power financing companies lend primarily to power discoms and these loans are generally considered secure since discoms are owned by the states. Recently, however, the announced merger has put PFC and REC on the radar of ratings agencies which have put their credit borrowing programmes ‘on watch’. This has led to a slowdown in their loan disbursements which, analysts say, is set to have a direct knock-on impact on the economy at a time when banks and non-banking financial companies (NBFC) have shied away from lending to infrastructure in general and the power sector particularly. 

“The acquisition by PFC of the government’s stake in REC is credit negative for PFC as it will materially weaken its consolidated capital ratios,” Moody’s had pointed out. While the transaction could create operational synergies, Moody’s believes that the negative impact from lower capital levels will outweigh benefits. 

Discoms also claim that REC’s disbursements have slowed down. “REC is not disbursing money for three months now,” admitted a state discom official, adding that PFC and REC were not taking up new projects for sanction too. Meanwhile, REC officials say that they are finding it tough to raise funds because of the ‘on watch’ rating but add that the situation is likely to persist only during the current quarter, which is traditionally the most active period when companies raise funds.

Both the lenders are set to meet respective stakeholders to allay concerns over a possible funding crunch in the sector. “There would be short term hiccups, but the uncertainties are likely to disappear once the deal is completed,” noted an observer. 

REC and PFC are looking at lending `5,000 crore each to Adani Power for its 1,600-MW Godda power project in Jharkhand, the largest debt financing for a greenfield thermal power project. 
Market analysts say that the negative sentiment also stems from the fact that PFC, in a record of sorts, had not approached the bond market since November, while REC had scrapped two bond issues aimed at raising about `3,000 crore each in December and January due to high interest rates. Its average borrowing cost has gone up by 65 basis points from 7.38 per cent last fiscal year. 

On the loan asset front, PFC has registered a loan asset growth of 14 per cent in October-December year-on-year and disbursements rose 20 per cent. However, the disbursements are a far cry from a high of `64,000 crore disbursed in FY17-18. REC’s disbursements are also higher than last year’s numbers.

PFC plans to fund the acquisition of the government’s 52.63 per cent stake in REC by sourcing `10,000 crore from its personal reserves and surplus for the `14,000 crore deal. Experts say that this is likely to further take a toll on PFC’s lending ability in the power sector unless extra capital is provided to the company. 

Average borrowing costs high
REC had scrapped two bond issues aimed at raising about H3,000 crore each in December and January due to high interest rates. Its average borrowing cost has gone up by 65 basis points from 7.38 per cent last fiscal year

capital shortage at pfc
PFC plans to fund the acquisition of the government’s stake in REC by sourcing H10,000 crore from its personal reserves and surplus for the H14,000 crore dealExperts say that this is likely to further take a toll on PFC’s lending ability in the power sector unless extra capital is provided

loan disbursals slow down
PFC’s loan assets have registered a loan asset growth of 14 per cent in October-December year-on-year
The firm’s total during the quarter rose 20 per centHowever, the disbursements are a far cry from a high of H64,000 crore disbursed by the company in FY17-18

52.63%of the government’s stake in REC is to be acquired by Power Finance Corporation

A10K crto be disbursed by PFC and REC to Adani Power 

1,600 MWpower plant to be built in Godda with the funds