PFC-REC merger may reduce overlapping bond issuances, improve efficiency

Market participants expect the merger to improve treasury efficiency and pricing discipline, while the combined entity continues to tap bond markets for funding

The merger of state-owned Power Finance Corporation (PFC) and REC Limited is expected to streamline bond issuances through a unified treasury operation, resulting in fewer overlapping fund raises and larger benchmark-sized issuances, market participants said.

 

On Monday, the board of PFC and REC approved the scheme of merger with REC shareholders receiving 88 equity shares of PFC for every 100 equity shares of REC held.

 

While gross bond issuance could moderate, the merged entity’s overall funding requirement is expected to remain largely unchanged as it will continue to finance large investments across the power and infrastructure sectors.

 

“The merged entity is expected to benefit from a single treasury operation, allowing better planning of bond issuances and improved funding efficiency. While gross bond issuances may reduce as overlapping borrowings are eliminated, the overall funding requirement is unlikely to decline materially,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

 

The merger will create India’s largest infrastructure financing institution with a combined loan book of over ₹11 trillion. However, unlike the merger of Housing Development Finance Corporation (HDFC) with HDFC Bank, the transaction is not expected to materially alter the dynamics of the corporate bond market.

 

The HDFC-HDFC Bank merger led to a structural reduction in corporate bond supply as one of the country’s largest bond issuers shifted from wholesale market borrowings to a deposit-funded banking model. However, both PFC and REC are government-owned non-banking financial companies that depend on bonds and other wholesale borrowings to fund lending. The merged entity will therefore continue to access the corporate bond market to finance investments in the power and infrastructure sectors.

 

“The HDFC-HDFC Bank merger permanently reduced bond supply because funding shifted to deposits. In the case of PFC and REC, the merged entity will continue to rely on the bond market, so the impact is more about improving issuance efficiency than reducing supply,” said a market participant.

 

Market participants said investors are also unlikely to materially reassess the combined entity’s credit profile. REC has been a subsidiary of PFC since 2019, and institutional investors, including banks, mutual funds and insurance companies, have generally managed their exposures to the two entities from a group perspective while monitoring concentration limits.

 

Further, a unified borrowing calendar is expected to improve pricing discipline by reducing competition between the two issuers in the primary market, while larger benchmark issuances could aid price discovery and improve execution. Over time, secondary market liquidity may also strengthen as trading gradually shifts towards a single PFC yield curve instead of being divided between PFC and REC, improving pricing transparency.

 

Market participants said that if investor demand remains healthy, corporate bond spreads are expected to remain supported, with yields staying stable or easing marginally.