(Bloomberg) — A recently announced merger of Indian lenders to the power sector is fueling hope that financing will get a boost for energy and other key drivers of the world’s fastest growing major economy.
The Indian government announced that it will combine state-owned Power Finance Corp. and unit REC Ltd. As money managers digest the details, they see two main ways the move is set to put more cash into the titans of the Indian economy as well as large-scale power projects.
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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.
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.