Tuesday, August 9, 2022

BPCL disinvestment has progressed, but there’s little clarity on several issues: Fitch Ratings

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  • ‘There is still little information about bidders, valuations or potential restrictions for the new owner in relation to employee protection, asset stripping and investment lock-in’

  • ‘BPCL’s bonds, which had USD 2 billion outstanding as of end-2020, will need to be refinanced or the holders’ consent solicited, should the government accept a winning bid’

New Delhi: Fitch Ratings has said that there is more visibility on the progress of Bharat Petroleum Corporation Limited (BPCL) (BBB-/Negative) disinvestment, following developments on key queries raised by potential buyers, but multiple steps of the process remain outstanding and there are still questions that require further clarity. “We will continue to monitor the situation and consider suitable rating action as and when there is progress,” said Fitch Ratings in a report released on Friday.

‘BPCL has made progress on key pre-conditions to its disinvestment’

BPCL has made headway on a key pre-condition to its disinvestment and other key milestones over the last six weeks, including the finalisation of terms to purchase Oman Oil Company’s 36.6 percent stake in its Bina refinery for Rs 24 billion in February 2021, said Fitch Ratings. BPCL also sold 5.8 percent of its 7.3 percent treasury shares for Rs 55 billion and approved the sale of its 61.7 percent stake in Numaligarh Refinery Limited for Rs 99 billion in March. The current book value of BPCL’s NRL investment is Rs 4.5 billion and the transaction will be subject to 20 percent long-term capital gains tax on the consideration value less the indexed cost of the acquisition and improvement as ascertained by the company.

This results in net proceeds of Rs 130 billion for BPCL, less the long-term capital gains tax, although the timing of each transaction may vary. The impact on BPCL’s Standalone Credit Profile (SCP) will depend on the extent to which the proceeds are used to reduce debt or make dividend payments in the coming year. BPCL declared an interim dividend of Rs 11 billion on March 16.

‘There’s little information on bidders, valuations, restrictions’

However, there is still little information about bidders, valuations or potential restrictions for the new owner in relation to employee protection, asset stripping and investment lock-in. Fitch is also monitoring the progress on interested parties receiving security clearances from the government, access to the data room, the start of the due diligence process, reserve-price disclosure by the government, the submission of financial bids by bidders and the solicitation of lenders’ consent, should a winning bid be selected.

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Fitch said that there is a need for further clarity on the future of subsidies paid to BPCL’s customers on the sale of liquified petroleum gas and kerosene as well as the freedom on pricing of petrol and diesel before the divestment can conclude. The government has traditionally used state-run oil marketing companies (OMCs), including BPCL, to carry out its socio-political agenda, but private companies may be less inclined to bear such regulatory risks, the ratings agency said.

‘Don’t expect govt to halt BPCL disinvestment if financial bids aren’t satisfactory’

BPCL’s bonds, which had USD 2 billion outstanding as of end-2020, will need to be refinanced or the holders’ consent solicited, should the government accept a winning bid triggering the change of control clause. “We believe the extent of refinancing or consent will depend on BPCL’s rating at the time. We do not expect the government to halt the sale should it be dissatisfied with the financial bids, given its budgeted disinvestment target and strongly articulated intent, but this could prolong the process,” said Fitch Ratings.

The sale of the government’s entire shareholding in BPCL would lead to a reassessment of BPCL’s ratings, based on a reassessment of its SCP and the nature of the potential buyers, including the credit quality of any majority parent and Fitch’s assessment of the strength of linkages between the new parent and BPCL.

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