Indian Power Financiers Fall as Utilities Promised Debt Reliefby and
Bonds offer returns 400-500 basis points below loans: analyst
Sufficient appetite for bonds issued in lieu of debt: Goyal
Power Finance Corp. and Rural Electrification Corp., which fund electricity projects in India, fell on concern their returns will be hurt by the government’s plan to ask states to take over the liabilities of debt-laden utilities and repay their lenders by issuing bonds.
Rural Electrification declined as much as 13 percent to 231.85 rupees in Mumbai trading, set for the sharpest drop since March 12, 2008. It traded at 244.10 rupees as of 11:34 a.m. local time. Power Finance fell as much as 11 percent, the most in more than two months. The benchmark S&P BSE Sensex dropped 0.4 percent.
The Indian cabinet Thursday approved a plan to reorganize about 5 trillion rupees ($76 billion) of debt at regional electricity retailers that have been weighed down by accumulated losses and loans, aiming to turn them profitable in three years. The plan will allow state governments, which own the retailers, to acquire over two years 75 percent of their debt as of Sept. 30 by selling bonds.
“The plan to turn state-run power distribution utilities profitable may lead to the conversion of some of the loans owed to power financiers to bonds, impacting their returns on equity,” said Amit Jain, an analyst at Mumbai-based Asian Markets Securities Pvt. “Typically, bonds offer returns that are 400-500 basis points below the loans and this can affect the profit of power financiers.”
The price of the bonds will be determined in consultation with the Reserve Bank of India and will be linked to government bonds, Power Minister Piyush Goyal said Thursday in New Delhi.
"There’s sufficient appetite in the market, considering that government borrowing has also been subdued in the current year, to absorb the bonds that will be issued in lieu of the REC and PFC debt," Goyal said.
The recast will reduce the interest cost to about 9 percent from as much as 15 percent, according to a government statement released Thursday.
“If power financiers convert their loans to bonds, the lower returns will narrow their net interest margins,” Punit Srivastava, deputy head of research at Mumbai-based Daiwa Capital Markets, said on phone.