BPCL disinvestment is event risk due to dearth of info, slow progress: Fitch Ratings

• The Negative Outlook reflects that on the Indian sovereign, the ratings agency said

• The valuation at which NRL is sold will determine the credit impact on BPCL, should NRL's sale proceeds be used to reduce debt at BPCL, said Fitch Ratings

New Delhi: Fitch Ratings has said on Wednesday that it views potential disinvestment of Bharat Petroleum Corporation Limited (BPCL) by the government as an "event risk" because there is little information about bidders, valuation, and the potential transaction structure. "We continue to treat the potential divestment of BPCL by the Indian state as an event risk, as there is little information about bidders, valuation, and the potential transaction structure, especially as BPCL owns assets across many verticals and bidders may not be interested in all of them," said Fitch.

Affirming BPCL's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-', Fitch Ratings said that the outlook is negative. The agency has also affirmed BPCL's senior unsecured rating and the ratings on its outstanding senior unsecured debt at 'BBB-.' Fitch has also affirmed the rating on subsidiary BPRL International Singapore Pte. Ltd's US dollar guaranteed notes at 'BBB-.'

'Negative outlook on BPCL reflects that on Indian sovereign'

"Fitch equalises BPCL's rating with that of its largest shareholder, the India sovereign (BBB-/Negative), based on Fitch's Government-Related Entities Rating Criteria, due to the strong likelihood of government support. The Negative Outlook reflects that on the Indian sovereign," the ratings agency said on Wednesday.

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The rating case incorporates weak petroleum product demand and gross refining margins (GRMs) in the near term, followed by a gradual recovery, and strong marketing margins, reflecting BPCL's ability to reap some benefits from low oil prices in its marketing segment, without a full cost pass-through to consumers. However, the improvement is subject to risks of weak industry conditions persisting beyond Fitch Rating's baseline scenario, or capex or shareholder returns that are higher-than-expected, which limits the headroom for its 'bb+' Standalone Credit Profile (SCP), said Fitch.

Extension in EoI submission deadlines a factor behind negative outlook

The deadline of 30 September 2020 for the submission of expressions of interest has been extended thrice since the initial announcement in November 2019. The slow progress has been due to a near halt in international travel to India and a generally cautious investment approach by most entities in current market conditions, in our view. Fitch will monitor developments and consider suitable rating action if the sale progresses.

'Valuation at which NRL is sold will determine the credit impact on BPCL'

The government intends to sell BPCL's 61.7 percent-owned subsidiary, Numaligarh Refinery Limited (NRL), to another state-owned enterprise as part of BPCL's divestment process. NRL has negligible debt, although the refinery contributes 6-8 percent of BPCL's throughput, and generates better GRMs than BPCL's other refineries given its higher complexity and tax benefits, contributing 18 percent of BPCL's EBITDA. The valuation at which NRL is sold will determine the credit impact on BPCL, should NRL's sale proceeds be used to reduce debt at BPCL. However, BPCL's credit metrics could slightly weaken if it pays out NRL's sale proceeds as dividends.

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