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Moody’s Investors Service today for the first time assigned a short-term debt rating – Baa3 – with a stable outlook to Indian petroleum major BPCL (Bharat Petroleum Corporation Ltd).
Moody’s has also assigned a provisional (P) Baa3 Prime-3 senior unsecured foreign currency debt rating, which is given to firms which have acceptable ability to repay short-term debt, to the proposed US dollar notes to be issued by BPCL.
The provisional bond rating was based on a review of documentation as of October 10, Moody’s said.
Moody’s would assign a definitive rating to the bond upon the closing of the proposed bond issuance and a review of the final terms.
“The Baa3 rating reflects BPCL’s strategic importance to the Indian government because of its position as the country’s third-largest refiner of crude oil and the second-largest distributor of petroleum products.
“It also takes into account the company’s relatively successful investments in upstream oil and gas assets, which provide longer term earnings potential,” Vikas Halan, Moody’s Vice President and Senior Analyst, said.
“These strengths are partially offset by BPCL’s high financial leverage, resulting from excessive fuel subsidies and relatively low-complexity refineries that generate lower margins,” he added.
BPCL’s Baa3 rating combines its standalone credit profile, or baseline credit assessment (BCA), of ba2 and two-notch uplift under the joint-default analysis (JDA) methodology for government-related issuers, given that the Indian government has a 54.9 per cent stake in BPCL.
BPCL’s profitability and cash flow were affected by India’s ad-hoc oil subsidy-sharing scheme, under which it sells diesel and cooking fuel at below-market rates to help the government manage inflation.
However, Moody’s said the Indian government has a track record of adequately compensating BPCL for under-recoveries and ensuring that it achieves a reasonable level of profitability.
“The government has a high degree of influence over the company’s strategy decisions because of its ability to appoint all of the directors on BPCL’s board. We expect the government to provide strong support in times of distress,” Vikas Halan said.
On the other hand, although the government’s recent measures – such as hiking diesel prices and limiting the sales volume of cooking fuels at subsidised rates – would help reduce the burden of oil subsidies, BPCL’s profitability and cash flow remain exposed to the uncertain regulatory environment, it added.
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