Ind-Ra downgrades Haldia Petrochemicals to AA-minus with negative outlook

India Ratings and Research (Ind-Ra) on Monday downgraded Haldia Petrochemicals Ltd's (HPL's) long-term issuer rating to AA-minus from AA while resolving the rating watch negative (RWN).

The outlook is negative, it said.

In March, HPL signed an agreement to acquire Lummus Technology -- a technology player in the petrochemicals and refinery segments that has been carved into separate entity by McDermott International Inc (MDR) -- for 2.7 billion dollars.

Ind-Ra said it has considered the standalone profile of HPL and has not consolidated the debt of 1.5 billion dollars taken at the asset level (Lummus) as the debt has been taken without recourse to the promoters.

Additionally, the promoter entities have not given any guarantee on the debt raised at the asset level. In addition, Ind-Ra has not factored in any additional outflow from HPL to support Lummus or any cash upstreaming from Lummus to HPL to arrive at the ratings.

As on March 31, since no transaction was initiated, financial consolidation was not required. The management will take a final call in due course as per the applicable norms for FY21. However, despite being a 57 per cent owned entity by HPL, Ind-Ra has not consolidated the same while arriving at the ratings of HPL.

The resolution of RWN and rating downgrade follow the likely increase in the net debt on account of the acquisition of Lummus. MDR, which is facing bankruptcy proceedings, has carved out Lummus into a separate entity which is likely to hold a debt of 1.5 billion dollars.

The balance consideration of 1.2 billion dollars is to be provided by HPL and Rhone Capital LLC (the other partner in the acquisition) in the ratio of their shareholding of 57 per cent and 43 per cent respectively, said Ind-Ra.

Besides, HPL remains a single product-line entity producing polyolefins. This exposes it to the volatility and cyclicality of the segment while companies inherently have limited pricing power.

While polyolefins constitute around two-thirds of the company's total revenue, the remaining is constituted by chemicals that are the by-products generated in the production of polymers.