Key rating drivers:
Plant Commissioning: Ind-Ra has maintained a Positive Outlook on OPAL to reflect the commissioning of OPAL's greenfield petrochemicals complex in FY17 and the company's expectations that the operations will be stabilised in FY18. The performance guarantee test runs are underway. Commercial operations at the petrochemical plant's polypropylene unit were started in June 2015.
Linkages with Sponsors: The affirmation reflects Ind-Ra's expectation that Oil and Natural Gas Corporation Limited (ONGC) will continue to support OPAL, considering the strong strategic and operational linkages between the two entities. OPAL is a forward integration project for ONGC and is thus strategically important for the latter. ONGC, along with another sponsor GAIL (India) Ltd ('IND AAA'/Stable), has provided the necessary undertakings to support any cost overruns in the project.
Plant Size and Scale: OPAL's petrochemical complex (1.1 million metric tonnes per annum capacity) is of a large size and scale. The barriers to entry into a petrochemical business are high, considering the complexity, capital, technical expertise and experience required to set up a project of this scale. The plant will primarily manufacture polypropylene, linear low-density polyethylene, high-density polyethylene, pygas, benzene etc. These products have a strong demand potential in India as well as in the other regions of Asia. OPAL is also focusing on producing higher grades of products which are being imported and are likely to command a higher premium. The company is also likely to benefit by selling its finished products within the special economic zones where it has a ready customer base.
Feedstock Linkages: OPAL has an assured supply of its key feedstock, namely ethane (C2), propane (C3), butane (C4) and naphtha (aromatic rich and low aromatic), from ONGC. Naptha is billed in Indian rupee and C2, C3, C4 in US dollars. C2, C3, C4 were to be billed on a cost-plus conversion cost basis under the initial agreements signed between ONGC and OPAL. Delays in the laying of a naptha pipeline from ONGC's Hazira plant has resulted in increased procurement cost for OPAL. The feedstock agreement is being revisited and the terms are likely to continue according to the initial agreement. OPAL is confident of being compensated by ONGC for the increased procurement cost. Also, OPAL's dual feed cracker will enable it to substitute naphtha with ethane and thus help it earn better profitability than from the traditional naphtha cracker. Any significant changes to the feedstock agreement, detrimental to OPAL, are likely to impact its profitability.
Refinancing Pressure: OPAL has repayments of INR71,790 million due at FYE18. OPAL may refinance/ roll over the short-term loans and may service term loans from internal accruals or borrow additional loans. In July 2016, OPAL raised INR56,150 million CCDs with a credit enhancement. The CCD proceeds were used to fully repay the medium term loan, subordinate loan and partially repay the short-term loans. OPAL plans to raise INR16,710 million through another CCD issuance in 1QFY18.
OPAL had to maintain a debt-equity ratio at 1.41:1 post-December 2015, as stipulated under the lenders' agreement. It has received an extension of the timeline to meet the covenant from some lenders. The debt-equity ratio was 1.91:1 on 31 December 2016. However, Ind-Ra draws comfort from ONGC's strong and ongoing sponsor support to OPAL.
Lower-than-estimated Equity Infusion: Lower-than-estimated equity infusions by OPAL's existing sponsors as well as delays in getting strategic investors on board have led to additional debt for the company in form of subordinate debt and short-term loans to fund its capex. This has increased its leverage levels and interest costs during construction. OPAL in July 2016 issued INR56,150 million of 8.75% CCDs and will issue INR16,710 million CCDs in 1QFY18 for partially financing project expenditure and meet repayment obligations. OPAL's profitability and timely debt servicing in its initial years of operations depend significantly on timely equity infusions and the consequent reduction in debt and interest burden.
Backstopping Arrangement from Sponsor for CCDs: The SO rating draws comfort from the unconditional and irrevocable mandatory put option on the sponsor, ONGC for a buy-out of the CCDs at the end of the 35th month from the deemed date of allotment, as well as the undertaking to fund the coupon payment. The sponsor would also have the right to buy-out the CCD at the end of the 24th, 30th and 35th month from the deemed date of allotment. As per the draft term sheet shared by OPAL with Ind-Ra, the CCDs would have a tenor of 36 months from the deemed date of allotment and will not have any conversion option for the period it is held by the investor. OPAL would use the proceeds for partially financing the project expenditures and repaying existing credit facilities availed from banks/financial institutions.
Undertaking for Coupon Payment of CCDs: The rating also factors the payment mechanism for timely coupon servicing on the CCDs. The CCDs would have an annual coupon payment, which will be paid through a no-lien service account created by OPAL. OPAL/ONGC will fund the service account with the requisite amount of the coupon payment on or before the coupon payment date.
RATING SENSITIVITIES
Positive: Stabilisation of operations and an improvement in the credit profile as envisaged by management could be positive for the ratings.
Negative: Inability to ramp up operations resulting in lower-than-expected improvement in the credit metrics in FY18 and/or any delay in support from the sponsors could be negative for the ratings.
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