Moody's lowers IOC rating to negative

Oil bonds are straining the public sector company's operating and financial profile.

Global rating agency Moody's Investors Service today lowered the outlook on oil refiner and retailer, Indian Oil Corporation (IOC), to negative from stable, citing strains on the company's finances as the government does not allow it to pass on the increase in global oil prices to the consumers.

Moody's has, however, maintained IOC's rating at Baa2, as against its Indian associate, ICRA's decision last week to downgrade the 80.3 per cent government-owned oil company's rating to LAA+ from LAAA.

"The change in outlook to negative reflects the persisting challenges arising from the oil subsidy scheme in India, and the consequent financial impact on IOC," said Terry Fanous, senior vice-president of Moodys Investor Services.

"The burden of under-recoveries is being exacerbated by the high oil prices, which are straining IOC's liquidity profile and credit metrics at the Baa2 rating level," Fanous added. The government has been issuing oil bonds to oil marketing companies - IOC, Hindustan Petroleum Corporation and Bharat Petroleum Corporation - to partly offset losses for not being allowed to increase retail prices at par with the rising global oil prices.

IOC's expansion programme, which entails active capital investments over the medium-term, is further challenging the rating. The ratio of Retained Cash flow /Debt is likely to remain below the 20 per cent guidance for the Baa2 rating in 2007-08 and 2008-09, based on the current subsidy scheme and continued high oil price environment, Moody's said.

The rating outlook could revert to stable if the ratio of Retained Cash Flow/Debt trends above 15 per cent and EBITinterest above 4 per cent on a consistent basis. Such improvement could be evidenced by a sustained change in the oil subsidy scheme that lessens the financial burden on IOC.

On the other hand, the rating could be lowered if there is no material change in the subsidy scheme or in IOC's capital structure, with the ratio of RCF/debt remaining below 15 per cent on a consistent basis.

The frequency and amount of oil bonds is straining the company's operating and financial profile. Moody's notes these challenges are tempered by IOC's substantial equity stake in Oil and Natural Gas Corp (ONGC), which could be monetized over time.

The borrowings of IOC as on March 31, 2007, were Rs 27,083 crore compared with Rs 26, 404 crore in the year-ago period. The total debt to equity ratio as on March 31, 2007, works out to 0.78 :1 as against 0.90:1 as on March 31, 2006, and the long term debt to equity ratio stands at 0.31:1 in the same period as against 0.39:1 y-o-y.

According to the consolidated financial statements of IOC, its subsidiaries and its joint ventures, the loans and advances from banks and financial institutions in foreign currency was Rs 3253.41 crore as on March 31, 2007, as against Rs 3698.89 crore on March 31, 2006.