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S&P, Moody's place Power Finance ratings on review over REC deal announcement

S&P Global Ratings and Moody's placed their respective ratings on India-based Power Finance Corp. Ltd. on review following the Indian government's announcement that it would sell a majority stake in power sector lender REC Ltd. to Power Finance.

S&P placed the BBB- long-term issuer credit rating on India-based Power Finance Corp. Ltd. on CreditWatch with negative implications. The rating agency said Dec. 12 that the CreditWatch placement is due to uncertainty around the company's funding of its proposed acquisition of REC.

However, S&P noted that the deal will likely strengthen Power Finance's market share and business franchise, although a debt-funded acquisition could undermine its capitalization.

Earlier in December, S&P revised the outlook on Power Finance to negative from stable.

The rating agency aims to resolve the CreditWatch status over the next three to six months once there is clarity on the deal's timing, cost, organizational structure and synergies, funding mix, impact on capitalization and when the proposed deal receives regulatory approvals.

Meanwhile, Moody's placed the Baa3 issuer ratings and "ba3" stand-alone credit profiles of Power Finance and REC on review for downgrade.

The review for downgrade is underpinned by the decision of the Indian government to grant in-principle approval to divest its 52.6% stake in REC to Power Finance, Moody's said Dec. 13.

The rating agency said the deal is credit negative for Power Finance because it will significantly weaken the company's capital ratios. Moody's believes that while the transaction could create some operational synergies, the negative impact from lower capital levels will outweigh any potential synergies.

Descriptions of credit ratings in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings document referred to in this news brief can be found here.