RPT-Fitch Rates India-based BPCL's Proposed CHF Bonds 'BBB-(EXP)'

Wed Feb 26, 2014 4:48am EST

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Feb 26 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned India-based Bharat Petroleum Corporation Ltd's (BPCL, BBB-/Stable) proposed notes denominated in Swiss francs an expected rating of 'BBB-(EXP)'. The notes are rated at the same level as BPCL's Issuer Default Rating (IDR) of 'BBB-' as they will constitute direct, unconditional, unsubordinated and unsecured obligations of the company. The final rating is contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

Sovereign Linkages: BPCL's IDR is equalised with that of India (BBB-/Stable) - which owns 54.9% of the oil company - to reflect the strong strategic and operating linkages between the two entities based on Fitch's Parent Subsidiary Linkage Criteria. The prices of some of the key products marketed by BPCL - retail diesel, public distribution kerosene and household LPG - are regulated by the State.

Under Recoveries Largely State Funded: BPCL's under recoveries (the difference between the international price and the state regulated price) for the first nine months of the financial year ending March 2014 (9MFY14) was INR248bn (9MFY13: INR300.1bn). The state directs upstream oil companies to provide a discount of USD56 per barrel to partly bear the under recoveries, which was equal to INR118bn for 9MFY14 (9MFY13: INR109bn) for BPCL. The rest of the under recoveries is largely borne by the government via budgetary support.

Subsidy Timing Impacts Cash Flows: While the upstream discount and the budgetary support mitigate the impact of the regulated pricing on BPCL's profitability, the delay in receipt of the subsidies impacts the working capital position of the company, and consequently its debt position and finance costs.

BPCL's Credit Profile: In FY13, BPCL had net leverage (net debt/EBITDA) of 3.8x (FY12: 4.4x) and interest cover (EBITDA/gross interest) of 2.6x (FY12: 2.1x) on a consolidated basis. The stand-alone debt as at end-December 2013 was INR167bn compared with INR238bn at end-March 2013. Fitch expects BPCL to maintain its credit metrics over the next three to four years at a level similar to that seen in the past.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

-An upgrade of India's sovereign rating provided that BPCL's current linkages with the state are maintained

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-A downgrade of India's sovereign rating

-A weakening of BPCL's linkages with the state

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