BPCL Privatisation To Prompt A Steep Downgrade, Says Moody’s

Moody's Investors Service on Thursday said it will downgrade Bharat Petroleum Corporation Ltd. to Ba1 if the government goes ahead with its BPCL privatisation plans.

Currently, being a public sector undertaking, BPCL has a BBB- rating—on a par with the sovereign rating. Ba1 rating will be equal to its current baseline credit assessment.

The government had last year sold its entire stake in Hindustan Petroleum Corporation Ltd. to PSU Oil & Natural Gas Corporation Ltd. HPCL, however, is still rated BBB- as it owned by ONGC.

According to Moody’s, the government’s proposed stake sale in BPCL would remove the company’s sovereign links and trigger bond redemption—a credit negative.

On Sept. 30, the group of secretaries on govenrment disinvestment gave its approval to sell the government’s entire 53.29 percent stake in BPCL. The oil marketer’s privatisation is likely to be completed by Mar. 31, 2020.

“BPCL’s Baa2 rating 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.

"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," Moody’s said.

"If the stake is sold to another government-owned company such that 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."

Moody’s support assessment for BPCL reflects the company's vital role in India's oil and gas sector. BPCL accounts for 15 percent of total installed refining capacity in India. It also distributes 21 percent by volume petroleum products consumed in the country.

According to the ratings agency, a BPCL stake sale, whether to a non-government-owned company or a state-owned one, 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.

BPCL had $1.7 billion of foreign currency bonds outstanding, as of Sept. 30. BPCL's liquidity is already inadequate and redemption of the foreign currency bonds will expose BPCL to significant refinancing risk.

As of March 31, 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.

The value of government stake in BPCL is worth about Rs 57,500 crore at the current market price.

On Thursday, BPCL shares rose 7.66 percent to Rs 531.90 apiece on the BSE while the Sensex shed 0.52 percent to end the day at 38,106.87 points.