Singapore, September 18, 2019 -- Moody's Investors Service ("Moody's") has affirmed the Ba1 corporate
family rating (CFR) of HPCL-Mittal Energy Limited (HMEL),
as well as HMEL's Ba2 senior unsecured bond rating.
At the same time, Moody's has changed the outlook on the ratings
to negative from stable.
RATINGS RATIONALE
"The change in outlook to negative reflects Moody's expectation
that HMEL's credit metrics may fail to improve to a level more appropriate
for its ratings, if there is a further deterioration in regional
refining margin environment ," says Vikas Halan, a Moody's
Senior Vice President.
HMEL's leverage -- as measured by debt/EBITDA -- increased
to around 5.3x for the 12 months ended 30 June 2019, compared
to Moody's downgrade trigger of 5.0x. This was driven
by both a decline in refining margins as well as HMEL's accelerated
capital spending on its petrochemical project.
"Singapore gross refining margins were weak during the first six
months of 2019, averaging just around $3.5/bbl.
While margins ticked up to an average of around $6.1/bbl
during July and August, this increase was mainly driven by seasonal
factors," adds Halan, who is also Moody's Lead
Analyst for HMEL.
Tightening regulations on the use of heavy fuel oil in the shipping industry
from 2020 could lead to higher demand for middle distillates and thus
provide some support to refining margins, particularly for complex
refiners like HMEL.
HMEL is also exposed to volatility in its working capital requirement,
which impacts its borrowing levels. HMEL has been looking to reduce
its working capital requirement and has arranged for extended credit terms
with some of its key suppliers, which will help moderate the impact
on its working capital requirement. HMEL has also arranged for
receivable factoring facilities on non-recourse basis with banks
which will further reduce its working capital requirements. However,
Moody's views such factoring arrangement as borrowings and adds
them to the company's adjusted borrowings.
The company is in the process of setting up a dual feed petrochemical
capacity of 1.2 million metrics tons per annum (mtpa). The
project, which commenced in October 2017, was originally planned
to be completed by March 2022. However, the company now intends
to complete it by April 2021, which will accelerate capital spending
and keep borrowings at an elevated level until such time.
Furthermore, HMEL's refinery will undergo 35 days of planned
shutdown during September-October 2020, which will constrain
its earnings and cash flows during fiscal year ending 31 March 2021 (fiscal
2021).
Moody's expects HMEL's leverage as measured by debt/EBITDA
to remain beyond its downgrade triggers at around 5.1x for fiscal
2020 and 6.0x in fiscal 2021. This is based on Moody's
expectation that HMEL will be able to generate EBITDA of $8/ barrel
of throughput in fiscal 2020 and $9/barrel in fiscal 2021.
However, Moody's notes that an improvement in average annual
refining margins by $1/barrel will lead to reduction in leverage
by about 0.6x.
While leverage should start recovering from April 2021, once the
petrochemical expansion starts contributing to earnings and cash flows,
any delays in ramp-up could defer such earnings and keep HMEL's
credit metrics under pressure.
HMEL's CFR is supported by the company's high complexity refinery that
generates high refining margins, and by its 15-year offtake
agreement with Hindustan Petroleum Corporation Ltd. (HPCL,
Baa2 stable) that provides high visibility on sale volumes.
The rating, however, is constrained by the moderate scale
of the company's operations, with a single refinery, single
crude distillation unit and exposure to the cyclical nature of the refining
industry. HMEL's CFR also takes into account Moody's expectation
that the company's credit metrics will remain pressured until at least
2021, because of its ongoing expansion into petrochemicals.
HMEL's Ba1 CFR incorporates a two-notch uplift based on Moody's
expectation that the company will receive extraordinary support from its
shareholder and key off-taker, HPCL. This reflects
HMEL's strategic importance to HPCL, its 49% ownership by
HPCL, as well as HPCL's management oversight and track record of
providing financial and operational assistance to HMEL.
At 31 March 2019, 73% of the total debt in HMEL's capital
structure was secured. As such, the claims of bondholders
are subordinated to those of secured lenders. Consequently,
Moody's rates the company's senior unsecured bonds one notch below its
CFR.
HMEL's ratings also consider the following environmental,
social and governance (ESG) factors.
First, HMEL is exposed to increasing environmental regulations and
safety risks associated with its refining business, which is among
the 11 sectors that Moody's has identified as having elevated environmental
risk. However, these risks are somewhat mitigated by the
company's track record of environmental compliance and its high
refining complexity with increasing downstream integration.
Second, the ratings consider HMEL's aggressive financial strategy,
as evidenced by its largely debt funded ongoing petrochemicals capacity
expansion. This is mitigated by company's low shareholder
returns , long dated debt maturity profile and an undertaking from
its sponsors to cover certain shortfall in internal cash generation and
cost overrun.
Third, HMEL is privately owned and its ownership is concentrated
in HPCL and Mittal Energy Investments, which each hold a 49%
stake. HMEL's board consists of nine directors out of which
only two are independent. HPCL is in turn 51.1% owned
by Oil and Natural Gas Corporation Ltd. (Baa1 stable), which
is 67.7% owned by the Government of India (Baa2 stable).
Mittal Energy Investments is a 100% subsidiary of Mittal Investments
SARL. The indirect, partial ownership by the Government of
India mitigates some of the risks arising from its concentrated ownership
structure.
Given the negative outlook, an upgrade is unlikely over the next
12-18 months. However, the outlook could be revised
to stable if refining margin environment improves such that HMEL is able
to reduce and maintain its leverage below 5.0x through March 2021.
The ratings could be downgraded if there is a sustained decline in either
refining margins or operational efficiency, resulting in lower cash
flow generation, such that the borrowings needed for the expansion
project are substantially higher than Moody's expectations.
Specifics metrics that would indicate downward ratings pressure during
the project construction phase include adjusted debt/EBITDA staying above
5.0x and EBIT/interest remaining below 2.5x beyond March
2020.
Moody's could downgrade the ratings if HMEL's credit metrics fail
to recover after project completion and stabilization, such that
debt/EBITDA stays above 4.0x and EBIT/interest stays below 3.0x.
HMEL's ratings could also face downward pressure if (1) Moody's
downgrades HPCL's ratings, or (2) there is a change in the relationship
between HPCL and HMEL that lowers Moody's assessment of the level of support
incorporated into HMEL's ratings.
The principal methodology used in these ratings was Refining and Marketing
Industry published in November 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
HPCL-Mittal Energy Limited, which commenced operations in
2011, owns an 11.3 million metric tons per annum (mmtpa)
refinery in Bathinda, Punjab, with a Nelson Complexity Index
of 12.6, making it one of the highest complexity refineries
in Asia.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vikas Halan
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
