proposed stake sale of state-run Bharat Petroleum Corporation (BPCL) could sever the company's links to the government and prompt bond redemption which will be a credit negative.
According to the ratings agency, if the stake sale goes ahead, the impact on BPCL's credit ratings will depend on whether the buyer is another state-owned company or a non-state-owned enterprise.
"BPCL's Baa2 ratings incorporate our expectation of the high likelihood of extraordinary support from the government, which results in two notches of uplift in the ratings," the ratings agency said in a statement.
If the government sells its entire stake to a non-government owned company, the ratings agency said: "We will no longer include the support from the government in BPCL's ratings. As a result, we will likely downgrade BPCL's ratings to Ba1, which is equal to its current Baseline Credit Assessment or its standalone credit strength, assuming there are no changes to the fundamental credit profile including our assessment of liquidity and refinancing risk.
"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."
However, it pointed out that a stake sale, whether to a non-government enterprise or a state-owned firm, will trigger a change of control on BPCL's bonds, which will require the company to redeem its bonds within 45 days of the change of control being triggered.
"There is no ratings condition attached to the put option for bondholders. A bond redemption will increase BPCL's refinancing risk significantly," the statement said.
As of September 30, 2019, BPCL had $1.7 billion of foreign currency bonds outstanding.
"BPCL's liquidity is already inadequate and redemption of the foreign currency bonds will expose BPCL to significant refinancing risk," the statement said.
On September 30, 2019, the group of secretaries on disinvestment gave its approval for
the government to sell its entire 53.29 per cent stake in BPCL.
The stake sale requires further approvals from the cabinet of ministers and both houses of the Indian Parliament.
( With inputs from IANS )