Moody's has also assigned Baa3 ratings to the foreign currency senior unsecured bonds to be issued by BPRL International Singapore Pte. Ltd. and guaranteed by BPCL. The issuance is in the form of a drawdown from an MTN program.
The outlook on the ratings of all three oil refining and marketing companies is positive.
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
"The ratings affirmation reflects the continued improvement in the credit metrics of the three oil refining and marketing companies, as diminished levels of fuel subsidies and moderated working capital requirement -- resulting from low oil prices -- have reduced borrowings," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.
The sustained decline in crude oil prices since June 2014, along with the deregulation of diesel prices since October 2014, has led to a structural decline in total subsidies in India.
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The amount of subsidies had fallen to INR276 billion in fiscal 2016 from INR 1.4 trillion in fiscal 2014. For the six months ended 30 September (1H FY2017), subsidies totaled INR78 billion.
Furthermore, the earnings of the oil refining and marketing companies have improved as the commissioning of new capacity and higher marketing margins have more than offset weaker refining margins.
"We expect the earnings of the state-owned refiners to improve as their additional capacities become fully operational during fiscal 2018," says Halan, who is also the lead analyst for the oil refining and marketing companies at Moody's.
As a result of better earnings and lower borrowings, the credit metrics of the oil refining and marketing companies have improved to levels that are more consistent with a higher BCA.
Debt/EBITDA for all three had dropped below 2x as of fiscal 2016 against more than 3x-4x in fiscal 2014. RCF/debt was above 35%-40% for fiscal 2016.
These and other metrics position the companies strongly relative to previous expectation. Consequently, Moody's has upgraded the baseline credit assessments (BCAs) of all three oil refining and marketing companies to ba1 from ba2.
However, the companies will continue expanding their capacities in line with the growth in demand for petroleum products in India. Such investments have long gestation periods, thereby resulting in negative free cash flows at certain points of their investment cycle.
Further, the oil refining and marketing companies plan to invest in upstream assets through acquisitions. BPCL and IOC invested $1 billion in 2016, buying upstream assets in Russia.
The continued need to expand capacity and investment in upstream assets could result in increased borrowings and weaker credit metrics, especially if refining or marketing margins decline.
The BCAs already incorporate a moderate deterioration in credit metrics. Nevertheless, we expect their fundamental stand-alone credit profile to remain well positioned at the current level.
The three oil refining and marketing companies are government-related issuers (GRIs) and their ratings incorporate their BCAs plus a one-notch uplift reflecting our expectation for government support. Their Baa3 ratings and positive outlook are in line with India's sovereign rating and outlook.
The BCAs could be upgraded further if the oil refining and marketing companies continue to manage their capacity expansion plans in such a way that their credit metrics continue to remain strong for their BCAs.
Specifically, RCF/debt staying above 20%-25% and EBIT/interest staying above 5x-6x will be indicative of upward pressure on the BCAs. An upgrade of the BCAs will not automatically lead to an upgrade of the issuer ratings. The final ratings will only be upgraded if the sovereign rating is upgraded.
The BCAs could be downgraded if the oil refining and marketing companies engage in more aggressive debt-funded expansion or acquisitions, such that their credit metrics weaken significantly. Specifically, RCF/debt falling below 10%-15% and EBIT/interest below 4x-5x will be indicative of downward pressure on the BCAs.
A downgrade of the BCAs will not automatically result in a downgrade of the issuer ratings.
The issuer ratings may face downward pressure if (1) the rating of the sovereign is lowered or (2) the government makes changes to the subsidy framework that are negative for oil refining and marketing companies, or (3) the oil refining and marketing companies' BCAs deteriorate below ba3, or (4) the relationship between the oil refining and marketing companies and the government changes, which would require a reassessment of the level of support incorporated into the ratings.
The proposed foreign currency bonds are rated at the same level as BPCL's foreign currency issuer rating because the bonds are unconditionally and irrevocably guaranteed by BPCL and the guarantee is pari passu to all senior unsecured obligations of BPCL.
List of ratings affirmed
.Issuer: Indian Oil Corporation
..Foreign Currency Issuer Rating, Baa3
..Senior Unsecured Regular Bond/Debenture, Baa3
.Issuer: Hindustan Petroleum Corporation
..Foreign Currency Issuer Rating, Baa3
.Issuer: Bharat Petroleum Corporation
..Foreign Currency Issuer Rating, Baa3
..Senior Unsecured MTN Program, (P) Baa3
..Senior Unsecured Regular Bond/Debenture, Baa3
List of ratings assigned
.Issuer: BPRL International Singapore
..Backed Senior Unsecured MTN Program, (P) Baa3
..Backed Senior Unsecured Regular Bond/Debenture, Baa3
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