Singapore, January 30, 2018 -- Moody's Investors Service has affirmed Hindustan Petroleum Corporation
Ltd.'s (HPCL, Baa2 stable) Baa2 foreign currency issuer
and senior unsecured bond rating. The outlook on all ratings is
stable.
RATINGS RATIONALE
The affirmation follows Oil and Natural Gas Corporation Ltd.'s
(ONGC, Baa1 stable) recent acquisition of 51.11% equity
stake in HPCL from the Government of India (Baa2 stable) for a consideration
of INR369.15 billion to be paid in cash by 31 January 2018.
The transaction remains subject to requisite approvals from the shareholders
of ONGC, which the company expects to achieve within 90 days from
the date of the agreement unless it manages to get an exemption from the
Ministry of Corporate Affairs of the Government of India.
Despite the acquisition by ONGC, HPCL will continue to operate as
a separate listed entity with its board of directors and senior management
separate from ONGC. The sale of stake by the government means that
Moody's will no longer classify HPCL as a government related issuer
and as such will not use its Joint Default Analysis framework for assessing
HPCL's credit ratings.
"Although we no longer classify HPCL as a government related issuer
but we continue to incorporate our expectation of extraordinary support
from the Government of India in HPCL's Baa2 issuer ratings,
through ONGC, which results in two notches of uplift from its standalone
credit strength," says Vikas Halan, Moody's Vice President
and Senior Credit Officer.
Moody's expects that the government, despite not being shareholder
of HPCL anymore, will continue to provide support to the company,
as a regulator, through setting price of controlled petroleum products
and managing the subsidy framework, and as provider of liquidity,
through the state owned banking system in India. The government
also continues to own 69% stake in ONGC.
In Moody's view, the government's control over HPCL's
business strategy will remain as strong as before. The government
will continue to consider HPCL as a "Central Public Sector Enterprise",
which means that all major decisions of HPCL will have to be approved
by the government. The government will also continue to appoint
all of the board of directors of HPCL.
The sale of stake also does not reduce HPCL's strategic importance
to the government. It is the third largest state-owned refining
and marketing company in India, accounting for 10.6%
of domestic refining capacity, along with the marketing and distribution
of 18.1% of petroleum products consumed in the country.
Further, HPCL, along with the oil and gas sector, is
one of the largest contributors to the government's revenue receipts.
"In addition to the expected extraordinary support from the government,
we also expect ONGC to provide support to HPCL in times of distress.
This is driven by ONGC's strong ability to provide support as reflected
in its Baa1 ratings and its willingness to provide support, which
is driven by HPCL's position as the largest subsidiary of ONGC.
In addition, any default by HPCL will cause a default on ONGC under
the terms of the latter's bonds given it will be deemed a material subsidiary,"
says Halan, who is also Moody's lead analyst for HPCL.
Further, HPCL's ratings will remain constrained by the rating of
the government given its linkages with the domestic economy.
HPCL's standalone credit profile reflects (1) its strong position
as India's third largest stated owned refiner of crude oil and third-largest
distributor of petroleum products; (2) the company's exposure to
cyclical refining margins, fuel subsidies and high working capital
swings that result in volatility in its credit metrics; and (3) low
capacity for further deterioration in the company's credit metrics,
which have weakened because of high dividend payments and increase capital
spending in the last 12 months.
An upgrade of HPCL's issuer rating to Baa1 will require an upgrade of
the ratings of both the Indian government and ONGC. A rating upgrade
will also require an improvement in HPCL's standalone credit quality.
HPCL's standalone credit quality could improve if the company's credit
metrics improve because of reduction in borrowings through free cash flow
generation. Credit metrics indicative of an improvement in HPCL's
standalone credit quality include retained cash flow (RCF)/adjusted debt
exceeding 25% on a sustained basis.
HPCL's issuer rating may face downward pressure if (1) the government
or ONGC's rating is downgraded; (2) the government makes changes
to the subsidy framework that are negative for HPCL; (3) the company's
standalone credit quality deteriorates by more than one notch ; or
(4) the government's direct or indirect ownership (through ONGC)
of HPCL is reduced below 51%, or government control is reduced
by some other means, which would require a reassessment of the level
of support incorporated into its ratings.
We would lower HPCL's standalone credit quality by a notch if its credit
metrics deteriorate as a result of (1) substantial loss of market share
for petroleum product distribution; (2) low marketing margins due
to higher competition from non-government players; (3) weaker
overall refining margins for company due to HMEL not able to maintain
high levels of capacity utilization; (4) large debt funded capex
plan.
Credit metrics indicative of a lower standalone credit quality by a notch
include RCF/adjusted debt below 15% on a fully consolidated basis.
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 is the third largest state-owned downstream company in India
by refining capacity. It specializes in oil refining, marketing,
distribution, and the retailing of petroleum products. Through
its 3 refineries (including the Bhatinda refinery), with a combined
capacity of 498 thousand barrels per day, it has a share of around
10.1% of India's refining capacity.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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
VP - Senior Credit Officer
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
