Acquiring the government's stake in REC Ltd is credit negative for Power Finance Corporation (PFC), said Srikanth Vadlamani of Moody's Investors Service, adding that the deal will materially weaken the consolidated capital ratios.

“From PFC perspective the key credit issue that we see is that the capital level of PFC at a consolidated level could materially come down because of this transaction. The decline depending on the various variables could be as much as 200-300 basis points. So there is negative credit pressure on PFC,” said Vadlamani. One basis point is a hundredth of a percentage point.

Given that PFC will be the main shareholder now and main support provider, negative pressure on PFC will translate into negative pressure on REC as well, he said.

The Cabinet Committee on Economic Affairs recently approved the sale of the government's 52.63 percent stake in REC Ltd to Power Finance Corporation (PFC). The government is expected to garner around Rs 15,000 crore from this merger.

“The basic expectation is that PFC will fund the transaction via debt funding,” said Vadlamani, adding that PFC could need immediate funding as the window is quite short.