Moody's downgrades currency ratings of ONGC, GAIL

However, the outlook for both the ratings is stable

Credit rating agency Moody's has downgraded the local currency ratings of state-owned Oil and Natural Gas Corporation (ONGC) and GAIL, as a reflection of the risks that these two entities share with the Indian government.

Moody's Investors Service has downgraded the local currency rating of ONGC to Baa1 from A2 and that of GAIL to Baa2 from A3. The outlook for both the ratings is stable.

"The rating actions reflect Moody's view that both ONGC and GAIL ultimately cannot be completely de-linked from the credit quality of the Indian government [Baa3, stable], and thus their ratings need to more closely reflect the risk that they share with the sovereign," Moody's said in a statement.

However, there has not been any deterioration in the intrinsic credit quality of either ONGC or GAIL, Moody's said.

Both issuers are still rated above the sovereign as a reflection of their stronger credit quality, but the gap is smaller than before, Moody's ssaid.

"In order to be rated significantly above the sovereign, an issuer needs not only be fundamentally stronger than the sovereign from a credit perspective, but also demonstrate a degree of insulation from the domestic macroeconomic and financial disruption," Moody's Vice President and Lead Analyst for ONGC Vikas Halan said.

ONGC gets over 85% of its revenue from India and GAIL gets almost 100%. Besides, both the firms have a high degree of direct government ownership (69% for ONGC and 57% for GAIL).

"A weaker sovereign has the potential to create a ratings drag, and therefore it is appropriate to limit the extent to which these issuers are rated higher than the sovereign, in line with Moody's Rating Implementation Guidance," Moody's said.

Domestic business concentration, banking/counterparty relationships, and government ownership and control are key channels for the transmission of credit stress, Moody's said.

"We continue to take into account ONGC's superior fundamental credit quality, evidenced by its low debt and strong liquidity, and position its rating two notches above the sovereign's rating," Halan said.

It added that de-linking it further from the sovereign is not appropriate because of the 69% government ownership and the material exposure to domestic business, banks and counterparties.

Regarding GAIL, Moody's Assistant Vice President Ray Tay said GAIL's financial profile is sufficiently strong to allow its ratings to be one notch above the sovereign.