Moody’s affirms OIL’s issuer rating, lowers credit assessment

Moody’s Investors Service has affirmed the ‘Baa3’ issuer ratings and senior unsecured bond ratings of Oil India (OIL). The rating agency, however, downgraded OIL’s baseline credit assessment (BCA) to ‘Ba1’ from ‘Baa3’ as it expects borrowings to fund the acquisition of the additional 54.2% stake from BPCL in Numaligarh Refinery (NRL) for `8,676 crore to put additional pressure the company’s credit metrics.

The agency noted that after the NRL acquisition, OIL’s liquidity will become inadequate because the acquisition has been partly funded by a short-term facility.

“The affirmation of OIL’s Baa3 issuer rating reflects our expectation of the high likelihood of extraordinary support from the Indian government that results in a one-notch uplift from OIL’s ba1 BCA,” said Sweta Patodia, a Moody’s analyst.

OIL’s credit metrics were already ailing because of low oil and gas prices throughout 2020, the rating agency noted. Moody’s assessment of high government support reflects OIL’s importance as a major integrated oil and gas firm, its strategic role in the development of oil and gas reserves in northeast India, and the government’s strong influence on the company’s financial and business policies.

The recent acquisition increased OIL’s stake in NRL to 80.2%. The rating agency expects OIL’s leverage will weaken to around 16% for FY22 from 51% in FY20, which is significantly below the 20%-25% threshold required to maintain the ‘baa3’ BCA. “The downgrade of OIL’s BCA is driven by our expectation that the company’s credit metrics will remain weakly positioned at least over the next 12-18 months driven by low oil and gas prices, as well as additional borrowings to increase its stake in NRL and fund the Mozambique LNG project,” Patodia added.

The NRL stake sale was part of the BPCL disinvestment plan. As of December 31, 2020, OIL had cash and cash equivalents of `3,390 against `4,300 crore debt maturing over the next 12 months.