BPCL: Moody’s warns BPCL of potential rating downgrade on government sale

Mumbai: Moody’s Investors Service on Tuesday said it has placed Bharat Petroleum Corporation’s (BPCL) ‘Baa2’ issuer ratings on review for downgrade, following the government’s decision to sell its entire 53.29 per cent stake in the company and to transfer management control to a strategic buyer.

BPCL’s 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 the 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,” Vikas Halan, senior vice president, Moody’s said in a release.

“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,” added Halan.

Moody’s said its 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, Moody’s said, adding 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 per cent as an event of default, which would result in bonds being immediately repayable, the ratings agency said.

Any bond redemption will significantly increase BPCL’s refinancing risk, it expressed its concerns.

As of November 22, BPCL had $2.3 billion of foreign currency bonds outstanding. The company had cash and cash equivalents of Rs 970 crore as of September 30.

Moody’s said the rating will be downgraded if the ratings agency 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 the company’s rating, or 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 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 the company’s rating; and BPCL’s standalone profile remains at least equivalent to the Ba1 level.