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Rating Action:

Moody's reviews BPCL's Baa2 rating for downgrade on government sale

26 Nov 2019

Singapore, November 26, 2019 -- Moody's Investors Service has placed the following ratings on review for downgrade:

- the ba1 baseline credit assessment of Bharat Petroleum Corporation Limited (BPCL)

- the Baa2 issuer and senior unsecured ratings of BPCL

- the (P)Baa2 senior unsecured rating on MTN program of BPCL and BPRL International Singapore Pte. Ltd. (BPRL)

- the Baa2 backed senior unsecured rating of BPRL.

BPRL is a wholly owned subsidiary of BPCL and its bonds are guaranteed by BPCL.

RATINGS RATIONALE

The review for downgrade follows the government of India's (Baa2 negative) decision to sell its entire 53.29% stake in BPCL and to transfer management control of the company to a strategic buyer.

BPCL's Baa2 rating incorporates its ba1 baseline credit assessment (BCA), a measure of its standalone credit strength, and a two-notch uplift from expected extraordinary support from the government.

The review for downgrade takes into account the uncertainty with respect to both the support incorporated into BPCL's rating as well as its BCA.

"Post the government's stake sale, we will not include the two-notch uplift from government support in BPCL's rating. This could result in downgrade of BPCL's ratings to Ba1, assuming there are no changes to its fundamental credit profile, including our assessment of liquidity and refinancing risk which could impact the BCA," says Vikas Halan, a Moody's Senior Vice President.

"Our assessment of BPCL's credit profile and any resultant rating action, post the stake sale, will depend on the ability and willingness of the buyer to provide extraordinary support to BPCL in the event of distress, and also the company's ability to maintain its standalone credit strength," says Halan, who is the lead analyst for BPCL at Moody's.

Moody's rating action also assumes that BPCL's status as a government owned entity in India will continue until at least the conclusion of the proposed sale.

The sale by the government will also trigger a change of control on some of 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. Further, BPCL's foreign currency bondholders could also decide to treat the government stake falling below 50% as an event of default, which would result in bonds being immediately repayable. Any bond redemption will significantly increase BPCL's refinancing risk. As of 22 November 2019, BPCL had $2.3 billion of foreign currency bonds outstanding. The company had cash and cash equivalents of INR9.7 billion as of 30 September 2019.

As part of its decision to sell its stake in BPCL, the government also announced that BPCL will also sell its 61.65% in Numaligarh Refinery Limited to other government owned oil & gas companies. The valuation of the stake and the use of proceeds from such sale is yet to be determined. The sale will also reduce BPCL's capital spending as it is one of the largest project that the company is working on.

BPCL has been operating under government control and its business strategy has been in line with government policy and objectives. A change in ownership could result in the company revising its business strategy or financial policies, which could have implications for its standalone profile.

The review will consider (1) the buyer's credit quality and its willingness to provide support to BPCL, (2) BPCL's business strategy, financial policies, access to liquidity and capital structure following the change in its ownership and (3) the government's plan for reimbursing BPCL for the sale of liquified petroleum gas at subsidized prices after the stake sale.

In terms of environmental, social and governance (ESG) factors, the rating considers BPCL's exposure to carbon transition risk. The uncertainty around BPCL's future ownership structure and its business and financial strategy has resulted in its rating being under review for downgrade.

The rating will be downgraded if (1) Moody's concludes that the ability and willingness of the buyer to provide extraordinary support to BPCL is not sufficient to result in a two-notch uplift to BPCL's rating; or (2) BPCL's standalone profile weakens following the change in ownership.

On the other hand, the rating could be confirmed at the current level if Moody's concludes that (1) the ability and willingness of the buyer to provide extraordinary support to BPCL is sufficient to result in at least two notches of uplift to BPCL's rating; and (2) BPCL's standalone profile remains at least equivalent to the Ba1 level.

The methodologies used in these ratings were Refining and Marketing Industry published in November 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

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

No Related Data.
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