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Credit downgrade may pinch Indian Oil’s forex loans

Government-dictated petroleum prices are taking their toll on the balance sheets of state-controlled oil companies.

business Updated: Feb 03, 2009 20:28 IST
Anupama Airy

Government-dictated petroleum prices are taking their toll on the balance sheets of state-controlled oil companies. Indian Oil Corp has informed its board that its foreign currency borrowings may suffer following its credit rating downgrade by Standard & Poor.

As the country’s largest oil refiner and marketer, IOC is a significant overseas borrower as it needs funds to import crude oil on a large scale. For the current year, IOC's estimated foreign currency outgo on account of crude oil imports is pegged at nearly $30 billion.

S&P had on January 1 downgraded IOC's rating from investment grade to non-investment category on lack of timely compensation from the government for the losses incurred by the oil company resulting from pricing its products below profitable levels.

"Although this downgrade by S&P is with respect to IOC's long term foreign currency issuer rating, it may also impact the company's short term foreign currency loans in terms of restricted availability of funds and the increase in pricing by banks," IOC informed its board at a meeting last week.

A senior IOC official who did not wish to be named said, "At present, this has not affected our bilateral foreign currency loans. But what impact could it have in future is something we cannot predict and therefore the board was sounded of the possible impact."

IOC also informed its board that S&P has further shown its discomfort by opining that the government's unwillingness to raise product prices (in the time of high global crude oil prices) has resulted in IOC emerging as an instrument for the
government's deficit financing and fiscal management policies.

"S&P has noted that this accounts for the government's moral obligation to support IOC, albeit the timeliness of such support remains questionable," IOC told the board.

IOC's long term foreign currency issuer rating has been downgraded from "investment grade rating of BBB minus (with stable outlook)" to "speculative grade rating of BB plus (with stable outlook),” which is one notch lower than the sovereign rating for the country as a whole.