The international Credit Rating Agency Moody’s on Thursday warned of downgrading Bharat Petroleum Corporation (BPCL) to Ba1, if the government goes ahead with privatisation by selling its stake to private entity.
Currently, being a state-owned enterprise, BPCL has a BBB- rating which is on par with sovereign rating. Ba1 rating will be equal to its current baseline credit assessment.
Last year, the government had sold its entire stake in HPCL to state-owned ONGC but the oil marketeer still enjoys BBB- rating considering ONGC ownership by the government.
Moody’s said the proposed stake sale in BPCL would remove the company’s links and prompt bond redemption, a credit negative.
On 30 September, the group of secretaries on disinvestment gave its approval for to sell government’s entire 53.29 per cent stake in BPCL, which is likely to be completed by March 31, next year.
The agency noted that BPCL’s credit ratings will depend on whether the buyer is another state-owned company or a non-state-owned company, if the stake sale goes ahead.
The stake sale will require further approvals from the cabinet of ministers and both houses of the Parliament.
“BPCL’s Baa2 ratings incorporate our expectation of the high likelihood of extraordinary support from the government, which results in two notches of uplift in the ratings,” Moody’s said.
The agency emphasised that its support assessment for BPCL reflects the company’s vital role in India’s oil and gas sector as the second-largest state-owned refining and marketing company in the country, accounting for 15 per cent of total installed refining capacity.
In addition, the company distributes 21 per cent of petroleum products consumed in the country by volume as of March this year.
The support assessment also reflects the government’s significant control over BPCL’s business strategy through its ability to appoint all the directors on the company’s board and its majority 53.29 per cent equity ownership.
“If the government sells its entire stake to a non-government-owned company, we will no longer include the support from the government in BPCL’s ratings. As a result, we will likely downgrade it to Ba1, assuming there are no changes to the fundamental credit profile including our assessment of liquidity and refinancing risk,” the agency said.
However, it further said, “if the stake is sold to another government-owned company such that the government continues to appoint all of BPCL’s board of directors and have substantial control over its operations, we will continue to include support in BPCLs ratings.”
A stake sale, whether to a non-government-owned company or a state-owned company, will trigger a change of control on 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. A bond redemption will increase BPCL’s refinancing risk significantly,” it added.
As of September 30, BPCL had $1.7 billion of foreign currency bonds outstanding. BPCL’s liquidity is already inadequate and redemption of the foreign currency bonds will expose BPCL to significant refinancing risk.
As of March 31, 2019, BPCL reported cash and cash equivalents of around Rs 5,300 crore, against Rs 10,900 crore of debt maturing over the next 15 months.
Government is looking to sell stakes in government- owned companies to contain its fiscal deficit.
At current share prices, the value of the government’s BPCL stake is worth about Rs 57,500 crore.