Singapore, October 04, 2019 -- Moody's Investors Service has assigned a Ba2 rating to the proposed
USD senior unsecured bonds to be issued by HPCL-Mittal Energy Limited
(HMEL, Ba1 negative). The proceeds from the bonds will be
used to refinance the company's existing indebtedness.
The rating outlook is negative.
RATINGS RATIONALE
"The Ba2 rating on the senior unsecured bond is one notch lower
than HMEL's Ba1 corporate family rating and is in line with HMEL's
existing 5.25% $375 million senior unsecured bonds
due 2027. The lower rating on the bonds reflects that the claim
of the bond holders is subordinated to the claims of secured lenders of
the company. At 31 March 2019, 73% of the total debt
in HMEL's capital structure was secured," says Vikas Halan,
a Moody's Senior Vice President.
HMEL's Ba1 corporate family rating (CFR) incorporates a two-notch
uplift based on Moody's expectation that the company will receive extraordinary
support from its shareholder and key offtaker, Hindustan Petroleum
Corporation Ltd. (HPCL, Baa2 stable), in times of need.
Moody's expectation 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.
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 HPCL that provides high visibility on sales 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.
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.
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. The increase 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 provide
some support to refining margins, particularly for complex refiners
like HMEL.
Moody's expects that HMEL's leverage — as measured by debt/EBITDA
— will remain beyond its downgrade triggers at around 5.1x
for fiscal 2020 and 6.0x in fiscal 2021. This expectation
is based on Moody's assessment that HMEL can 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 a 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 flow,
any delays in ramp-up could defer such earnings and keep HMEL's
credit metrics under pressure.
HMEL's ratings also consider the following environmental, social
and governance 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 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 the company's low shareholder returns,
long-dated debt maturity profile, and an undertaking from
its sponsors to cover certain shortfalls in internal cash generation and
cost overruns.
Third, HMEL is privately owned and its ownership is concentrated
in HPCL and Mittal Energy Investments, which each hold a 49%
stake in HMEL.
HMEL's board consists of nine directors, 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).
The indirect, partial ownership by the Government of India mitigates
some of the risks arising from its concentrated ownership structure.
HMEL's liquidity is adequate. As of 30 June 2019, the
company had cash and cash equivalents of INR7.2 billion and INR33.5
billion of debt maturing over the next 12 months.
Moody's expects that the company's internally generated cash flow
from operations and cash balance will sufficiently cover its debt maturities,
maintenance capex, as well as dividend payments over the next 12-15
months.
The company's liquidity position is further supported by its long-standing
banking relationships and strong access to the debt capital markets.
HMEL also has a committed term loan facility of INR148 billion for its
petrochemical project, of which, INR106 billion remain undrawn
as of 30 June 2019; an amount which will be sufficient to fund the
remaining project cost.
The negative ratings outlook 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 the regional refining
margin environment.
Given the negative outlook, an upgrade is unlikely over the next
12-18 months. Nevertheless, Moody's could revise
the outlook to stable if the refining margin environment improves,
such that HMEL is able to reduce and maintain its leverage below 5.0x
through March 2021.
Moody's could downgrade the ratings 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 this rating 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
