Power Finance Corporation's borrowing costs overseas may rise after its credit rating outlook was changed from stable to negative by Standard & Poor's. If such a downgrade materialises, it will push the rating from investment to speculative grade. PFC's stock fell by 4.6 per cent after the announcement. However, the stock's reaction seems to be overdone.
For one, S&P has predicted that there is only a 33 per cent chance of the rating actually being downgraded. PFC's rating is linked to the sovereign rating.
Two, PFC currently relies mainly on domestic sources for funding. PFC's total foreign exchange liabilities accounted for a mere 6 per cent of its overall borrowing as of December 2011.
The future foreign borrowings might come at a higher cost for PFC as the investors will now take into account the risk of the company being downgraded to non-investment.
However, with domestic interest rates already beginning to subside, PFC may choose to borrow locally. PFC's ability to tap the tax-free bond route through a public offer will also reduce the overall cost of borrowing for the company.
PFC may also not have to resort to large fresh borrowings to refinance existing debt anytime soon. The lion's share of PFC's borrowings will mature post-March 2014 (by which time economy may be in a better shape).