PFC–REC Merger Likely To Boost Renewable Financing, Strengthen Grid Funding And Expand Underwriting Capacity: CreditSights

New Delhi, Feb 11: The proposed merger of state-run lenders Power Finance Corporation (PFC) and REC Ltd is expected to improve financing access for India's renewable energy developers, particularly for large and complex projects, CreditSights said on Wednesday.

PFC and REC, both public sector non-banking financial companies (NBFCs) focused on power sector financing, have loan books broadly split across renewables (15-25 per cent), transmission and distribution (40-45 per cent), and conventional power generation (25-30 per cent).

"We believe financing should be more readily available for the renewable companies' large ticket-size complex projects that were more challenging to individually fund in the past, given single counterparty lending limits prescribed by the RBI (30 per cent of Tier 1 capital for PFC and REC)," CreditSights, a Fitch Solutions Company, said.

The merger to enable larger underwriting capacity and facilitate refinancing of sizeable debt, including overseas dollar bonds, at competitive rates for renewable energy companies.

The combined entity is likely to have a stronger capital base, potentially easing funding constraints for large-ticket renewable projects that were earlier more difficult to finance individually due to Reserve Bank of India (RBI) norms on single borrower exposure. Currently, single counterparty lending is capped at 30 per cent of Tier-1 capital for both PFC and REC.

"The merger could also improve financing availability for larger transmission grid capex programs, translating into improved grid connectivity for renewable projects; a major pain point for the renewable companies," it said.

However, the merger may marginally reduce competition in the power-focused NBFC space, potentially leading to some upward pressure on funding costs.

"While the merger could result in an uptick in funding costs as competition will be reduced in the NBFC space, we expect the impact on the renewable players to be manageable, with both NBFCs bound by their state mandate to lend to the power sector at competitive costs," CreditSights added.

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