New Delhi: Renewable energy firms and state power distribution companies fear a funding crunch in the power sector due to the takeover of REC by Power Finance Corp (PFC), even as both state-run firms started meeting stakeholders to allay their concerns.
The two companies that finance power projects recently met credit ratings firms, which have put their borrowing programmes on ‘credit watch’ after the announcement of the deal in the first week of December. Power secretary Ajay Bhalla, meanwhile, dispelled concerns of a financial crunch in the companies and the sector, and said the uncertainties would disappear once the deal took shape.
Power distribution companies of at least three states said REC’s disbursements have slowed down. An official in Andhra Pradesh said REC was not disbursing money for the past two months.
An REC official said it was finding it difficult to raised funds due to the ‘credit watch’ status put on them by ratings firms, but declined to comment further. It is usual for ratings firms to put companies on ‘credit watch’ during M&As, as they assess the impact of the deals on the credit profile.
REC had scrapped two bond issues to raise about Rs 3,000 crore each in December and January due to high interest rates. Its average borrowing cost was 7.38% last fiscal year, which has shot up by 60-65 basis points in recent bond issues.
An executive with a renewable energy firm said PFC and REC were not taking up new projects for sanctions. Several industry observers said funding issues were expected in at least the ongoing quarter, typically the most active period for raising funds and completing targets.
“The concerns stem from the fact that most other banks have hit their sectoral limits and have stopped lending due to stressed loans,” an expert said.
Power secretary Bhalla said the uncertainty would disappear in a month or so as the deal would be finalised by then. “There are lots of negative sentiments in the market about the REC-PFC acquisition. The companies have met the rating agencies to dispel the fears in the market,” he said.
He said regulatory approvals for the deal were being obtained.
Market regulator Securities and Exchange Board of India has given its approval and the REC board has submitted the requisite resolution to the Reserve Bank of India that governs non-banking finance companies. Earlier, REC’s independent directors had expressed reservations over the deal and deferred passing the resolution at two board meetings.
An approval from the Competition Commission of India is expected shortly. Both companies have to also obtain approval from domestic and international lenders and they have appointed consultants for this.
A market observer said PFC had not approached the bond market since November, which he called “a record of sorts”.
“The NBFC usually does not resort to large borrowings from banks,” said another observer. On an average, the company has been raising 65% of its borrowings through bonds and about 10% through term loans as these are pricier and the tenure is shorter, he said.
“The company is borrowing term loans which have the option of pre-payment without penalty. The costlier ones can be replaced with cheaper loans once the bond markets open up,” a PFC official said. He said its disbursements so far were much more than the Rs 39,000 crore registered in the same period last year, but would not exceed the total of Rs 64,000 crore disbursed in fiscal 2017-18.
REC’s disbursements are also higher than last year’s numbers till the end of the third quarter.
PFC plans to fund the acquisition of REC mostly through internal accruals and is likely to borrow about Rs 7,000 crore from domestic banks and insurance companies. It is confident of maintaining capital adequacy ratio of about 18% against the RBI-prescribed 15% for NBFCs.