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Moody’s hints at possible downgrade of BPCL due to privatisation effect

FE Bureau
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Moody's Investors Service on Tuesday placed the ratings for Bharat Petroleum Corporation Ltd (BPCL) under review for downgrade, citing potential uncertainties the state-run oil marketing company would face in the absence of the government support it currently enjoys. The agency's present rating for BPCL is 'Baa2' and this takes into consideration the "expected extraordinary support from the government".

"Post the government's stake sale, we will not include the two-notch uplift from government support in BPCL's rating," said Vikas Halan, senior vice-president, Moody's. This could result in downgrade of BPCL’s ratings to 'Ba1', which denotes medium-grade and is subject to moderate credit risk. The new rating would depend on the credit quality of the buyer and its willingness to provide support to the company.

BPCL's new business strategy, financial policies, access to liquidity and capital structure would also have a bearing on the revised rating.

Moody's also flagged the risks regarding BPCL's refinancing risks from potential bond redemption triggered by the upcoming change in control. The government stake sale will require BPCL to redeem some bonds within 45 days from the change in ownership. In addition to that, BPCL's foreign currency bondholders might choose to treat the government stake falling below 50% as an event of default, warranting bonds to be immediately repayable.

As on November 22, BPCL had $2.3 billion of foreign currency bonds outstanding while its cash and cash equivalents stood at Rs 970 crore as on September 30. At FY19-end, BPCL had cash and cash equivalents of around Rs 5,300 crore (which included short-term investments of Rs 4,600 crore) against Rs 10,900 crore of debt maturing over the next 15 months. BPCL is the second largest state-owned refining and marketing company in the country, accounting for 15% of total installed refining capacity. In addition, it distributes about 21% of petroleum products consumed in the country by volume.

As reported by FE earlier, in anticipation of the "enormous pricing flexibility" that BPCL might enjoy if its new owner turns out to be one with oil major crude oil assets and experience in oil retailing, state-run Indian Oil Corporation (IOC) is evaluating the option of throwing its hat in the ring and taking over the entire government stake in fellow oil-refiner-marketer. However, the government would rather sell its 53.3% stake in BPCL to a private firm - Saudi Aramco and Reliance are reportedly among the possible bidders for the asset - than sell it to another PSU.

In FY18, the government had raised Rs 36,915 crore by selling its 51% stake in HPCL to upstream major ONGC and in FY19, the its REC stake was sold to PFC for `15,000 crore. These deals were strictly in line with the policy objective of government exiting businesses where no strategic interest is involved.