Moody’s hints at RIL downgrade; shares up 3%

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Mumbai: Moody’s Investors Service on Monday said the announcement by Reliance Industries Ltd that it is in initial talks to acquire Dutch petrochemicals giant LyondellBasell could result in a downgrade of RIL’s Baa2 credit rating, depending on the size of the deal and how it is funded.

It said if the combined entity’s retained cash flow-to-debt dropped below 20% and Ebit-to-interest coverage fell below 4x on a consistent basis, a downgrade in the rating was possible. Moody’s last rating action on RIL was taken on March 2, when the agency retained the company’s Baa2 status with a stable outlook, following the announcement of RIL’s merger with subsidiary Reliance Petroleum Ltd.

Meanwhile, disregarding Moodys’s fears the stock price of RIL surged 3.31% on the BSE on Monday to close at Rs 2,195.50.

As of September, RIL had around $4.2 billion in cash and liquid investments and roughly another $8 billion in Treasury shares. If liquidated, these could provide the company with significant resources to fund a potential deal without materially impacting its financial metrics.

“Moody’s is not taking any rating action at this stage since the offer is preliminary and non-binding and it is subject to due diligence,” said the agency’s assistant vice-president & analyst, Ivan Palacios. He added that Moody’s would furnish a more detailed response if and when a transaction materialises.

“To the extent a transaction takes place, Moody’s will consider a range of key issues, which may have an effect on RIL’s business and financial profile,” Palacios said. These include the funding structure for the transaction and the resulting financial profile, business and operating profile of the combined entity, potential integration challenges, the group’s long-term financial strategy, and assessment of RIL’s growth strategy and other strategic initiatives that could emerge over the medium term.