Moody's assigns Baa2 ratings to Oil India's proposed USD bonds

Moody's Investors Service has assigned a Baa2 rating to Oil India's (OIL) proposed foreign currency senior unsecured bonds to be issued by Oil India International, a wholly-owned subsidiary of OIL.

The net proceeds from the bond issuance will be used for refinancing the company's foreign currency borrowings for an acquisition in Russia.

The ratings outlook is stable.

RATINGS RATIONALE

The proposed foreign currency bonds are rated at the same level as OIL's foreign currency issuer ratings because the bonds are unconditionally and irrevocably guaranteed by OIL and the guarantee is pari passu to all senior unsecured obligations of OIL.

"Even though the guaranteed amount has been restricted to 110% of the principal amount of the bonds outstanding, we view it as sufficient to cover the amounts due to bondholders. The restriction of a guarantee to a finite amount is driven by regulations in India, which do not allow open-ended guarantees for obligations of offshore subsidiaries, rather than an actual intention on OIL's part to restrict its liability under the bonds," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

"OIL's issuer ratings incorporate our expectation that despite the company's weakened credit metrics, following the acquisition of upstream assets in Russia, its financial profile will be consistent with the Baa2 ratings over at least the next 12-18 months," says Halan, who is also Moody's Lead Analyst for OIL.

"However, the headroom for OIL's ratings category is now minimal for further debt-funded acquisitions, shareholder payments or a weaker operating performance," adds Halan.

OIL's Baa2 ratings is supported by a) its position as the second largest state-owned E&P company in India, accounting for about 9.7% (excluding condensate) and 8.8% of the total production of crude oil and natural gas in the country respectively, b) its operating track record of more than 50 years, and c) its competitive cost position from its onshore production, resulting in high profitability and its ability to generate solid operating cash flow.

Settlement of OIL's contingent royalty claims of INR104 billion in February 2017 by a direct payment by the central Government of India (Baa3 positive) to the state governments of Gujarat and Assam is credit positive.

OIL's rating, however, is constrained by a) its relatively small scale of production, b) its exposure to the ad hoc but improving fuel subsidy-sharing mechanism in India, c) execution risk from its inorganic and organic growth strategy in areas where it does not have an extensive track record, such as overseas and offshore fields, and d) narrow headroom for its credit metrics under its rating category.

The ratings outlook is stable, reflecting Moody's expectation that: 1) OIL's fuel subsidy burden will remain at near zero levels, as long as oil prices stay below $60/barrel, and 2) OIL's growth plan will continue to be executed within the tolerance level of its current ratings.

A ratings upgrade is unlikely because OIL's ratings remain constrained by the scale of the company's reserves and production.

Negative pressure on the ratings could develop if the oil price environment were to deteriorate significantly, such that oil prices fall and stay below $35 over a prolonged period.

Negative pressure could also develop if OIL makes further large debt-funded acquisitions, resulting in weaker credit metrics.

Credit metrics indicative of downward pressure on the ratings include RCF/debt below 25% and EBITDA/interest below 5x. Moody's notes that while OIL's RCF/debt will likely remain below the downgrade threshold over the next two years, RCF/net debt above 30%-35% will allow some time for its credit metrics to recover.

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