Oil marketing companies fear rating downgrade

Oil marketing companies (OMCs) fear a rating downgrade, as borrowings of the government-owned entities remain well above Rs 1 lakh crore and a fuel price rise is pending.

A cut in ratings could raise their borrowing costs, especially for foreign funds.

On June 1, Fitch Ratings had lowered the rating outlook of Indian Oil Corporation, long with those of other government-controlled companies. This followed the lowering of India’s rating for long-term foreign and local currency (issuer default ratings) from stable to negative. (Click here for charts)

A senior executive in an oil company told Business Standard, “We fear if petroleum prices are not increased, ratings may turn negative.”

 

Non-revision in the prices of diesel, liquefied petroleum gas and kerosene for more than a year led to OMCs resorting to heavy borrowings, which rose 23 per cent to Rs 1,57,617 crore at the end of the quarter ended June, compared with Rs 1,28,272 crore at the end of the previous quarter.

IndianOil has a foreign currency loan portfolio of about $7.5 billion. “We continue to borrow from the international market and interest rates have not changed due to the outlook downgrade. The positive thing is the credit rating has not been downgraded. But if the government does not compensate us fully, there may be problems on that front, too,” said P K Goyal, director (finance), IndianOil.

The government’s balance sheet is also stressed, owing to a mounting subsidy bill. Petroleum subsidy accounted for about 30 per cent of the subsidy bill of Rs 2,16,297 crore in 2011-12. “If the price increase does not happen, the government will have to give higher budgetary support,” said Abhinav Goel, senior director, Fitch Ratings.

However, that these companies are government-owned is comforting for rating agencies and lenders. “We believe the government is using the pricing of petroleum products as a tool to push its socio-economic goals. OMCs are, therefore, strategically important for the government,” said Goel. The government would support these companies through subsidy and discounts from upstream companies.

However, many say the government-ownership tag could also lead to hurdles.

A lot depends on market conditions. But even at the peak of economic slowdown in 2008, IndianOil was able to raise money, though private companies were unable to secure funds. The country’s largest petroleum marketer is funded by banks in various regions, including the US, the UK, Norway, the Netherlands, Germany, France, Mauritius, South Africa, West Asia, Japan, Taiwan, Singapore and Australia.