Moody's assigns Baa2 to Reliance's proposed USD bonds

Moody's Investors Service has assigned a Baa2 senior unsecured foreign currency debt rating to the proposed issuance of USD-denominated senior unsecured bonds by Reliance Industries (RIL). The outlook on the rating is stable.

The proposed bonds follow the company's successful issuance of $1 billion 4.125% 10-year senior unsecured notes due 28 January 2025.

The bond proceeds will be used to fund the company's capital expenditure (capex).

Ratings Rationale

The proposed bond will rank pari passu with all of RIL's other existing and future unsecured and unsubordinated obligations.

"RIL's Baa2 rating reflects its leading market position, globally competitive refining business which has consistently commanded higher margins than its competitors, and vertically-integrated operations across the hydrocarbon chain. The rating also recognizes RIL's moderate financial leverage, strong operating cash flow and excellent liquidity," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

 

At the same time, the Baa2 rating incorporates RIL's exposure to the inherent volatility of refining and petrochemical margins, its single location refinery's concentration risk and the execution risk from its diversification into consumer businesses. The rating also accommodates Moody's expectation that RIL will use its financial flexibility to make growth-enhancing investments that will boost its business and geographical diversification.

"Over the next 12 months, we expect RIL's credit metrics to remain stable, supported by strong earnings contributions from its refining and petrochemical segments even as the company increases its borrowings to partially fund its large INR1.8 trillion capex plan. Moreover, we anticipate RIL's credit profile will improve upon completion of the planned capex as the refining segment projects will enhance its refining margin by about $2.0 - $2.5 per barrel," adds Halan.

The company's strong liquidity profile is supported by its high levels of cash and liquid assets, and expected strong cash flow generation. As of 31 December 2014, RIL had cash and cash equivalents of INR787 billion compared to total debt of INR1.5 trillion.

RIL has a local currency issuer rating of Baa2 with a positive outlook. The positive outlook reflects the strengthening of the company's financial metrics above the parameters required for a Baa2 rating. The positive outlook also incorporates Moody's expectation that any diversification outside its current petroleum, retail or telecom businesses will be moderate, and executed in cognizance of the parameters - both financial and operational - that underpin RIL's rating.

However, RIL's foreign currency debt ratings have a stable outlook, as they remain constrained by India's sovereign foreign currency ceiling.

RIL's local currency rating could be upgraded if the company a) successfully executes its capex plans and further improves its refining and petrochemicals segments' margins; or b) substantially improves the contribution of its Indian exploration and production business. Credit metrics that support an upgrade include retained cash flow/adjusted net debt of above 30%-35% and EBIT/interest over 8.0x, both on a sustained basis.

However, the outlook on the local currency rating could revert to stable, if: 1) RIL fails to resolve its disputes with regulators such that it fails to increase its gas production over the next 12 to 18 months; 2) RIL undertakes transformational debt-funded acquisitions; or 3) RIL pursues growth that entails higher business risk and is not part of its current petroleum, retail or telecom data strategy.

Additionally, if its credit metrics fails to improve after the completion of the expansion projects, such that retained cash flow/adjusted net debt remains below 30%, then the outlook would revert to stable.

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