The ratings placed on review for downgrade include BPCL's ba1 baseline credit assessment, its Baa2 issuer rating and Baa2 backed senior unsecured rating for Bharat PetroResources Ltd, a subsidiary of BPCL.
Moody’s Investors Service on Tuesday said it has placed Bharat Petroleum Corp Ltd’s rating on review for downgrade after the government decided to privatise the country’s second-biggest state oil refiner. “The review for downgrade follows the government of India’s decision to sell its entire 53.29 per cent stake in BPCL and to transfer management control of the company to a strategic buyer,” the rating agency said in a statement. The ratings placed on review for downgrade include BPCL’s ba1 baseline credit assessment, its Baa2 issuer rating and Baa2 backed senior unsecured rating for Bharat PetroResources Ltd, a subsidiary of BPCL.
BPCL’s Baa2 rating incorporates its ba1 baseline credit assessment (BCA), a measure of its standalone credit strength, and a two-notch uplift from expected extraordinary support from the government. The Cabinet headed by Prime Minister Narendra Modi had on November 20 decided to privatise BPCL by selling the government’s entire stake to a strategic investor along with management control.
Moody’s said the review for downgrade takes into account the uncertainty with respect to both the support incorporated into BPCL’s rating as well as its BCA. “Post the government’s stake sale, we will not include the two-notch uplift from government support in BPCL’s rating. This could result in a downgrade of BPCL’s ratings to Ba1, assuming there are no changes to its fundamental credit profile, including our assessment of liquidity and refinancing risk which could impact the BCA,” said Vikas Halan, Moody’s Senior Vice President.
“Our assessment of BPCL’s credit profile and any resultant rating action, post the stake sale, will depend on the ability and willingness of the buyer to provide extraordinary support to BPCL in the event of distress, and also the company’s ability to maintain its standalone credit strength.” Moody’s rating action also assumes that BPCL’s status as a government-owned entity in India will continue until at least the conclusion of the proposed sale. The sale by the government will also trigger a change of control on some of BPCL’s bonds, which will require the company to redeem its bonds within 45 days of the change of control being triggered.
There is no ratings condition attached to the put option for bondholders. “Further, BPCL’s foreign currency bondholders could also decide to treat the government stake falling below 50 per cent as an event of default, which would result in bonds being immediately repayable. Any bond redemption will significantly increase BPCL’s refinancing risk,” it said. As of November 22, BPCL had USD 2.3 billion (about Rs 16,300 crore) of foreign currency bonds outstanding. The company had cash and cash equivalents of Rs 970 crore as of September 30.
As part of its decision to sell its stake in BPCL, the government also announced that BPCL will also sell its 61.65 per cent in Numaligarh Refinery Ltd to other government-owned oil & gas companies. “The valuation of the stake and the use of proceeds from such sale is yet to be determined,” Moody’s said. “The sale will also reduce BPCL’s capital spending as it is one of the largest projects that the company is working on.” BPCL has been operating under government control and its business strategy has been in line with government policy and objectives.
A change in ownership could result in the company revising its business strategy or financial policies, which could have implications for its standalone profile, it said. “The review will consider the buyer’s credit quality and its willingness to provide support to BPCL, BPCL’s business strategy, financial policies, access to liquidity and capital structure following the change in its ownership and the government’s plan for reimbursing BPCL for the sale of liquified petroleum gas at subsidized prices after the stake sale,” it said.