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Rating Action:

Moody's affirms ratings of Indian state-owned oil refiners

05 Jan 2017

Singapore, January 05, 2017 -- Moody's Investors Service has affirmed the Baa3 ratings of India's three state-owned oil refining and marketing companies -- Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Ltd. (HPCL).

Moody's has also assigned Baa3 ratings to the foreign currency senior unsecured bonds to be issued by BPRL International Singapore Pte. Ltd. and guaranteed by BPCL. The issuance is in the form of a drawdown from an MTN program.

The outlook on the ratings of all three oil refining and marketing companies is positive.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

"The ratings affirmation reflects the continued improvement in the credit metrics of the three oil refining and marketing companies, as diminished levels of fuel subsidies and moderated working capital requirement -- resulting from low oil prices -- have reduced borrowings," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

The sustained decline in crude oil prices since June 2014, along with the deregulation of diesel prices since October 2014, has led to a structural decline in total subsidies in India.

The amount of subsidies had fallen to INR276 billion in fiscal 2016 from INR 1.4 trillion in fiscal 2014. For the six months ended 30 September (1H FY2017), subsidies totaled INR78 billion.

Furthermore, the earnings of the oil refining and marketing companies have improved as the commissioning of new capacity and higher marketing margins have more than offset weaker refining margins.

"We expect the earnings of the state-owned refiners to improve as their additional capacities become fully operational during fiscal 2018," says Halan, who is also the lead analyst for the oil refining and marketing companies at Moody's.

As a result of better earnings and lower borrowings, the credit metrics of the oil refining and marketing companies have improved to levels that are more consistent with a higher BCA.

Debt/EBITDA for all three had dropped below 2x as of fiscal 2016 against more than 3x-4x in fiscal 2014. RCF/debt was above 35%-40% for fiscal 2016.

These and other metrics position the companies strongly relative to previous expectation. Consequently, Moody's has upgraded the baseline credit assessments (BCAs) of all three oil refining and marketing companies to ba1 from ba2.

However, the companies will continue expanding their capacities in line with the growth in demand for petroleum products in India. Such investments have long gestation periods, thereby resulting in negative free cash flows at certain points of their investment cycle.

Further, the oil refining and marketing companies plan to invest in upstream assets through acquisitions. BPCL and IOC invested $1 billion in 2016, buying upstream assets in Russia.

The continued need to expand capacity and investment in upstream assets could result in increased borrowings and weaker credit metrics, especially if refining or marketing margins decline.

The BCAs already incorporate a moderate deterioration in credit metrics. Nevertheless, we expect their fundamental stand-alone credit profile to remain well positioned at the current level.

The three oil refining and marketing companies are government-related issuers (GRIs) and their ratings incorporate their BCAs plus a one-notch uplift reflecting our expectation for government support. Their Baa3 ratings and positive outlook are in line with India's sovereign rating and outlook.

The BCAs could be upgraded further if the oil refining and marketing companies continue to manage their capacity expansion plans in such a way that their credit metrics continue to remain strong for their BCAs.

Specifically, RCF/debt staying above 20%-25% and EBIT/interest staying above 5x-6x will be indicative of upward pressure on the BCAs. An upgrade of the BCAs will not automatically lead to an upgrade of the issuer ratings. The final ratings will only be upgraded if the sovereign rating is upgraded.

The BCAs could be downgraded if the oil refining and marketing companies engage in more aggressive debt-funded expansion or acquisitions, such that their credit metrics weaken significantly. Specifically, RCF/debt falling below 10%-15% and EBIT/interest below 4x-5x will be indicative of downward pressure on the BCAs.

A downgrade of the BCAs will not automatically result in a downgrade of the issuer ratings.

The issuer ratings may face downward pressure if (1) the rating of the sovereign is lowered or (2) the government makes changes to the subsidy framework that are negative for oil refining and marketing companies, or (3) the oil refining and marketing companies' BCAs deteriorate below ba3, or (4) the relationship between the oil refining and marketing companies and the government changes, which would require a reassessment of the level of support incorporated into the ratings.

The proposed foreign currency bonds are rated at the same level as BPCL's foreign currency issuer rating because the bonds are unconditionally and irrevocably guaranteed by BPCL and the guarantee is pari passu to all senior unsecured obligations of BPCL.

The principal methodology used in these ratings was Refining and Marketing Industry published in November 2016. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Indian Oil Corporation Ltd, headquartered in New Delhi, is a leading downstream company, specializing in oil refining, marketing, distribution, and the retailing of petroleum products, petrochemicals and natural gas. It is listed on the Indian stock exchanges and is 58.28%-owned by the Indian government.

Bharat Petroleum Corporation Limited is headquartered in Mumbai. The company is a leading downstream company, specializing in oil refining, marketing, distribution, and the retailing of petroleum products. The company is listed on the Indian stock exchanges and is 54.9%-owned by the Indian government.

Hindustan Petroleum Corporation Ltd., headquartered in Mumbai is one of the leading downstream companies in India, specializing in oil refining, marketing, distribution, and the retailing of petroleum products. It is listed on the Indian stock exchanges and is 51.11% owned by the Indian government.

List of ratings affirmed

.Issuer: Indian Oil Corporation Ltd

..Foreign Currency Issuer Rating, Baa3

..Senior Unsecured Regular Bond/Debenture, Baa3

.Issuer: Hindustan Petroleum Corporation Ltd.

..Foreign Currency Issuer Rating, Baa3

.Issuer: Bharat Petroleum Corporation Limited

..Foreign Currency Issuer Rating, Baa3

..Senior Unsecured MTN Program, (P) Baa3

..Senior Unsecured Regular Bond/Debenture, Baa3

List of ratings assigned

.Issuer: BPRL International Singapore Pte. Ltd.

..Backed Senior Unsecured MTN Program, (P) Baa3

..Backed Senior Unsecured Regular Bond/Debenture, Baa3

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
SUBSCRIBERS: (852) 3551-3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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