Power Finance Corp. Ltd. 'BBB-' Rating Affirmed And Removed From CreditWatch Negative On REC Takeover; Outlook Is Stable

  • PFC's consolidated capital levels will reduce significantly due to its debt-funded acquisition of REC Ltd.
  • We believe the India-based power-sector lender's capitalization will improve over the next two years via internal sources, although delays to stressed asset resolutions could slow the process
  • We are affirming our 'BBB-' long-term issuer credit rating on PFC. At the same, we our removing all ratings from CreditWatch with negative implications.
  • The stable outlook reflects our view that PFC's risk-adjusted ratio will increase to around 7% and that synergies will develop following the takeover of electricity lender REC Ltd.
SINGAPORE (S&P Global Ratings) April 11, 2019--S&P Global Ratings affirmed its 'BBB-' long-term issuer credit rating on Power Finance Corp. Ltd. (PFC). The outlook is stable. We also affirmed our 'BBB-' long-term issue rating on the bank's senior unsecured debt.
We have removed all the ratings from CreditWatch, where they were placed with negative implications on Dec. 12, 2018.
We affirmed the rating on PFC after resolving significant uncertainty around the impact of the acquisition REC Ltd., another state-owned power-sector lender. The debt-funded acquisition has lowered our consolidated risk-adjusted capital (RAC) ratio for PFC to 6.5% as of Dec. 31, 2018, from 10.1% as of March 31, 2018. While this is below our likely downgrade trigger, we expect the RAC ratio will revert to above 7% over the next 12-18 months, on strong internal capital generation. We have lowered our assessment of the lender's capital and earnings by one-notch to adequate.
Offsetting this reduction in capitalization is the additional strength to PFC's consolidated business franchise. Nearly doubling in size, PFC group now accounts for around 50% of total power sector financing in India. Further, its total loan book is commensurate with some of India's largest private sector banks. We believe that this strengthened market position and future synergies will enhance PFC's ability to defend its business franchise.
A recent Supreme Court ruling on the Indian central bank's Feb. 12, 2018 circular may result in delays to the resolution of stressed power sector assets. Any material delay that requires greater-than-expected additional provisioning or undermines asset values would impact the speed this recapitalization.
Our stable outlook reflects our view that PFC's RAC ratio will increase to around 7.0% over the next 12-18 months and that long-term synergies will be derived from the acquisition of REC Ltd.
We would lower our rating if PFC does not maintain a RAC ratio above 6.5%. This could be due to higher-than-expected dividends or loan growth, or substantial unexpected increases in provisioning.
An upgrade is highly unlikely because the rating is capped by our rating on the government of India (BBB-/Stable/A-3).
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