The first works like this: The companies combined have outstanding rupee bonds of 5.5 trillion rupees ($61 billion) — accounting for nearly 10% of the local market — and the merger will put part of that in play for reinvestment. That’s because money managers will eventually need to find new investments to avoid hitting regulatory limits. Funds can’t hold more than 10% of assets in a single AAA rated issuer, and the merger will effectively halve their max exposure.
The second way it could help is by easing financing for larger, more complex power projects, which have at times struggled to obtain credit due to a separate cap on lending to individual projects. With a larger combined pool of resources, the ceiling for such loans could rise.Creditsights analysts expect the merger may lead to funding larger ticket size, complex projects in India’s power sector that historically faced challenges obtaining financing due to counterparty lending limits. Combining the lenders would raise the ceiling on lending to individual projects. It could also help refinancing larger obligations, they wrote in a note.
The two lenders, created to finance power projects across the country, are among the largest rupee bond issuers in the market.
They are also among the biggest lenders for the sector. The outstanding loan assets for Power Finance were at 5.7 trillion rupees as of Dec. 31, while REC stood at 5.8 trillion rupees, according to the firms’ earnings presentations.Also read: Axis Bank sees loan growth outpacing industry, margins improving
Power Finance’s board on Saturday gave its in-principle approval for the merger with REC. Investors may have to fine tune their holdings to comply with internal and regulatory limits on single company exposure, said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Co.
To be sure, fund managers may not have to make the shift to adjust to new groupwide limits all at once. They’re hopeful regulators will exempt their existing holdings, like they did when banking giant HDFC Bank Ltd. carried out a similar merger in 2023.
But any jolt of activity in India’s 58 trillion rupee local credit market has long been just what many analysts say is needed for the goals of making the nation a developed economy by 2047. Fresh capital is also needed to finance power grid upgrades to accelerate clean energy growth.
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“The merger of PFC – REC will raise investor demand for alternative AAA rated papers in India as both were frequent issuers,” according to Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Funds Management Ltd., India’s largest money manager. That should help keep yields down on such debt from other high-rated borrowers, he said.
(Edited by : Srabastee Biswas)
