BPCL privatisation to prompt downgrade, says Moody’s

Moody’s Investors Service on Thursday said if a non-government firm takes over the entire government stake in BPCL, it would likely downgrade the state-run oil marketing company by two notches to Ba1, which denotes medium-grade and is subject to moderate credit risk. Whether BPCL is to be privatised or sold to another PSU, the proposed stake sale of 53.29% government stake in the company will prompt bond redemption and attendant refinancing risks, the rating agency added.

Currently, the agency’s rating for BPCL is Baa2 and this takes into consideration “the high likelihood of extraordinary support from the government” that corresponds to two notches of uplift in the rating. “If the stake is sold to another government-owned company such that the government continues to appoint all of BPCL’s board of directors and have substantial control over its operations, we will continue to include support in BPCL’s ratings,” the rating agency said.

On Thursday, the BPCL stock touched Rs 525.3, the highest in 52 weeks and 11.8% up from September 30, when a group of secretaries on disinvestment approved the sale of government’s entire stake in BPCL. Sale of BPC stake, at current share prices, could fetch the government around Rs 57,500 crore or 55% of its FY20 disinvestment target of Rs 1.05 lakh crore. So far in the current financial year, it has garnered Rs 12,357 crore, or 12% of this fiscal’s target, via sale of government stakes in companies via various routes.

The BPCL stake sale would significantly increase the firm’s refinancing risk as it will require it to redeem its bonds within 45 days of the change of control. As of September 30, BPCL had $1.7 billion of foreign currency bonds outstanding. At FY19-end, BPCL had cash and cash equivalents of around Rs 5,300 crore (which included short-term investments of Rs 4,600 crore) against Rs 10,900 crore of debt maturing over the next 15 months. The company’s liquidity is already inadequate and redemption of the foreign currency bonds will expose it to significant refinancing risk, Moody’s noted.

BPCL is the second largest state-owned refining and marketing company in the country, accounting for 15% of total installed refining capacity. In addition, it distributes about 21% of petroleum products consumed in the country by volume. The government had repealed three relevant Acts of Parliament to remove BPCL from their purview in April 2016, thereby removing a key stumbling block to the sale of government stake to a private firm.