Merger involving $61 billion in debt to support India’s credit market

A recently announced merger of India’s energy sector lenders is fueling hopes that the financing will boost energy and other key drivers of the world’s fastest-growing major economy.The Indian government has announced that it will acquire state-owned Power Finance Corp. and the REC Ltd unit. will merge. As money managers digest the details, they see two main ways this move will pump more money into the titans of the Indian economy and into large-scale energy projects.

The first works like this: the companies together have outstanding rupee bonds of 5.5 trillion rupees ($61 billion) – good for almost 10% of the local market – and the merger will put some of that towards reinvestment. That’s because money managers will eventually have to find new investments to avoid hitting regulatory limits. Funds cannot hold more than 10% of assets in a single AAA-rated issuer, and the merger will effectively halve their maximum exposure.Total debentures in local currency per PFC, REC

The second way it could help is by easing financing for larger, more complex energy projects, which sometimes struggle to obtain credit because of a separate cap on loans to individual projects. With a larger pool of resources, the ceiling for such loans could increase.

Creditsights analysts expect the merger could lead to the financing of larger, complex projects in the Indian energy sector that have historically faced difficulties in obtaining financing due to counterparty credit limits. Combining the lenders would raise the ceiling for loans to individual projects. It could also help refinance larger obligations, they wrote in a note.

The two lenders, set up to finance power projects across the country, are among the largest rupee bond issuers in the market.

They are also among the largest lenders to the sector. Outstanding loan assets for Power Finance stood at 5.7 trillion rupees as of December 31, while REC stood at 5.8 trillion rupees, according to the companies’ earnings presentations.

The board of Power Finance gave its approval in principle for the merger with REC on Saturday. Investors may need to fine-tune their investments to meet internal and regulatory limits on exposure to a single company, said Churchil Bhatt, executive vice president at Kotak Mahindra Life Insurance Co.

To be fair, fund managers may not need to take the step to adapt to the new group-wide limits all at once. They are hopeful that regulators will exempt their existing assets, as they did when banking giant HDFC Bank Ltd. implemented a similar merger in 2023.

But any jolt of activity in India’s 58 trillion rupee local credit market has long been exactly what many analysts say is needed to make the nation a developed economy by 2047. New capital is also needed to finance power grid upgrades to accelerate clean energy growth.

“The PFC – REC merger will increase investor demand for AAA-rated alternative papers in India as both were frequent issuers,” said Rajeev Radhakrishnan, chief investment officer for fixed income at SBI Funds Management Ltd., India’s largest money manager. That should help keep interest rates on such debt from other highly rated borrowers low, he said.