Moody's downgrades corporate family rating of HPCL-Mittal Energy to 'Ba2'

Global rating agency Moody's has downgraded the corporate family rating (CFR) of HPCL-Mittal Energy Limited (HMEL) from “Ba1” to “Ba2” due to the deterioration in HMEL's credit metrics, driven by the weak refining environment in Asia. 

The company's expansion into petrochemicals, which has kept HMEL's borrowings at elevated levels, also has bearing on the credit metrics.

Moody's also downgraded HMEL's senior unsecured bond rating to Ba3 from Ba2. At the same time, it changed the outlook on the rating to "stable" from "negative".

Rating agency in a statement said that the weak industry conditions are reflected in the Singapore benchmark refining margins, which declined to around $3.7/barrel (bbl) for 2019 compared to its historical average of $6-$7/bbl. This decline in the benchmark was due to the extremely weak fuel oil spreads, which in turn were driven by the International Maritime Organization's new regulation restricting the use of heavy fuel oil in marine transportation.

HMEL's credit metrics were also impacted by its ongoing expansion into petrochemicals which has led to an increase in its borrowings. The company is in the process of setting up a dual feed petrochemical capacity of 1.2 million metrics tonnes per annum (mtpa).

The project, which commenced in October 2017, was originally planned to be completed by March 2022. However, the company now intends to complete it by April 2021, accelerating its capital spending and keeping its borrowings at elevated levels.

Nonetheless, there have been no material cost over-runs so far and the total project cost continues to largely remain within management's initial estimates. 

Consequently, HMEL's leverage, as measured by debt/EBITDA, increased to around 6.9x for the last twelve months ended December 2019 compared to 5.3x for the last twelve months ended June 2019. At the same time, its interest cover, as measured by EBIT/Interest, declined to 1.4x from 2.9x over the same period.

Tightening regulations on the use of heavy fuel oil in the shipping industry, which kicked off in January 2020, could lead to higher demand for middle distillates and thus provide some support to refining margins, particularly for complex refiners like HMEL.

HPCL-Mittal Energy Limited, which commenced operations in 2011, owns an 11.3 million metric tonnes per annum (mmtpa) refinery in Bathinda, Punjab, with a Nelson Complexity Index of 12.6, making it one of the highest complex refineries in Asia.