SINGAPORE: S&P Global Ratings foresees credit risks at Indian state-owned enterprises (SOEs) from corporate activity designed to support the Indian government's budgetary coffers.
The rating agency said on Tuesday that in the last three months, 10 SOEs have announced or executed buybacks for a cumulative amount of 150bil rupees (RM8.67bil), which will count toward the government's target of 800bil rupees from monetisation of SOE stakes for the full year.
“The impact on the respective companies can vary depending on the size of cash outflow. Extracting cash from SOEs decreases their financial flexibility in a stress scenario, which – at least over the short term – is credit negative at the firm level,” it said.
S&P said the extraction of existing excess capital in the form of dividends generally only has an impact on the short-term business of SOEs.
This is because dividends are discretionary and can be scaled back if future profitability is low. In contrast, we believe that debt-funded share buybacks, mergers or acquisitions have longer-term implications.
Further, reduced government linkages to divested firms may lower the likelihood of government support in a stress scenario.
“We recognise the argument that the government is simply taking money from better-capitalised SOEs to help fund projects and bail out public sector banks as well as other stressed SOEs, so on aggregate the government maintains roughly the same level of engagement with the sector,” it said.
S&P Ratings said one such example includes Life Insurance Corp. of India's (LIC) capital infusion into IDBI Bank Ltd. in 2018, which allowed the bank to meet the regulatory capital
requirement and was credit supportive.
“Credit metrics and direct (or, in some cases, indirect) government linkages through ownership also matter to us.
“Power Finance Corp. Ltd.'s (PFC; BBB-/Watch Neg/--) capitalisation, on the other hand, is under pressure due to the government's direction to acquire REC Ltd. (unrated), another SOE that finances India's power sector.
“While we await the final acquisition cost, PFC's leveraged buyout of the government's 52% shareholding in REC led us to place the rating on CreditWatch with negative implications.
"Although we don't expect a change in government support for PFC, if the government were to reduce its shareholding, this would trigger a review of our rating on PFC with pressure likely to the downside,” it said.
S&P Ratings said the impact on some other SOEs may be smaller. The share buybacks announced so far, including the 40bil rupees offering at Oil and Natural Gas Corp Ltd (ONGC; BBB-/Stable/--) that opened on Tuesday, are manageable within the credit profiles of respective SOEs.
“For the eight companies that have announced substantial buybacks of over 2bil rupees, the buyback amounts vary between 0.1 times to 0.8 times their respective fiscal 2018 EBITDA.
However, the risk of a large and disruptive payout increases as the government runs out of time on its SOE stake sale target for the financial year,” the rating agency said.