Moody’s lowers Oil India’s credit assessment on Numaligarh refinery buyout

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March 31, 2021 1:05 AM

The recent acquisition increased OIL's stake in NRL to 80.2%. OIL's credit metrics were already ailing because of low oil and gas prices throughout 2020, the rating agency noted.

MoodysIn its commentary on India, Moody's said the countermeasures to combat the second wave some of which are due to remain in place at least until the end of April risk weakening the economic recovery.

Moody’s Investors Service on Tuesday downgraded Oil India’s (OIL’s) baseline credit assessment (BCA) to ‘ba1’ from ‘baa3’ as it expects borrowings to fund the acquisition of the additional 54.2% stake in Numaligarh Refinery (NRL) for Rs 8,676 crore to put additional pressure the company’s credit metrics.

The recent acquisition increased OIL’s stake in NRL to 80.2%. OIL’s credit metrics were already ailing because of low oil and gas prices throughout 2020, the rating agency noted.

“The downgrade of OIL’s BCA is driven by our expectation that the company’s credit metrics will remain weakly positioned at least over the next 12-18 months driven by low oil and gas prices, as well as additional borrowings to increase its stake in NRL and fund the Mozambique LNG project,” said Sweta Patodia, a Moody’s analyst.

Moody’s expects OIL’s leverage will weaken to around 16% for FY22 from 51% in FY20, which is significantly below the 20%-25% threshold required to maintain the ‘baa3’ BCA.

The NRL stake sale was part of the BPCL disinvestment plan as the latter held 61.7% ownership of the refinery. The Assam government held 12.4% stake in NRL while OIL owned the remaining shares. Moody’s has however affirmed the ‘baa3’ issuer ratings and senior unsecured bond ratings of OIL. “The affirmation of OIL’s Baa3 issuer rating reflects our expectation of the high likelihood of extraordinary support from the Indian government that results in a one-notch uplift from OIL’s ba1 BCA,” Patodia added.

The agency noted that after the NRL acquisition, OIL’s liquidity will become inadequate because the acquisition has been partly funded by a short-term facility. As of December 31, 2020, the company had cash and cash equivalents of Rs 3,390 against Rs 4,300 crore debt maturing over the next 12 months.

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