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Moody rates ONGC's debt at Baa1

ONGC said on Wednesday that international credit rating agency Moody's had assigned it a Baa1 (stable) rating.

india Updated: Feb 01, 2006 15:53 IST

Oil and Natural Gas Corp Ltd (ONGC) said on Wednesday that international credit rating agency Moody's had assigned it a Baa1 (stable) rating, in the India's flagship state-run explorer's first debt rating.

"This rating is two notches higher than India's sovereign rating," Finance Director RS Sharma said, adding that it was the best-ever rating assigned to an Indian company.

ONGC shares were down 0.45 per cent at Rs 1,232 in a nearly flat Mumbai market.

Moody's Investors Service has assigned an A2 local currency issuer rating to Oil and Natural Gas Corporation Ltd (ONGC). The local currency rating addresses an issuer's ability to meet its local currency obligations without incorporating the issue of foreign currency convertibility into the analysis.

At the same time, Moody's assigned an indicative foreign currency debt rating of Baa1 to ONGC. The indicative foreign currency debt rating of Baa1 is the rating that would be assigned to foreign currency bonds sold under foreign law. At this point in time, Moody's has not assigned this rating to a specific debt issuance. The outlook on the ratings is stable.

In assigning the A2 local currency issuer rating, Moody's has applied its joint default analysis (JDA) methodology for Government Related Issuers. In accordance with this methodology, the A2 rating reflects the following inputs: (i) a baseline credit assessment of "3" (on a scale of 1 to 6, where 1 represents the lowest credit risk); (ii) the Ba2 local currency sovereign rating of India; (iii) medium dependence, and (iv) high support from the Indian government.

The baseline credit assessment of 3 reflects ONGC's dominant position in the oil / gas industry in India, its substantial asset base and operation scale, competitive cost position as well as strong credit measures and solid liquidity position.

At the same time, the baseline credit assessment incorporates the regulatory uncertainties surrounding India's subsidy-sharing mechanism, the large capex program, as well as customer and asset / production concentration risk. Furthermore, event risk and execution risk are heightened in view of the company's acquisitive / growth strategy, particularly with regard to its ambitions for overseas expansion.

The high support reflects ONGC's national importance and strategic role in economic development, translating into high incentives for government support. Moody's believes the maintenance of majority ownership in the company will continue as a key feature of government policy.

The medium dependence takes into account the dominant role of ONGC in India's oil sector, its domestic market focus and the medium credit correlation between ONGC and the Indian government. ONGC is the dominant oil and gas company in India, accounting for over 75% of total proved reserves in the country. It has a globally competitive cost structure, providing an important cushion against a low oil price environment.

ONGC's low financial leverage, solid liquidity position and strong credit protection measures provide support for the rating. The company ranks strongly in terms of adjusted debt to proved developed reserves, which stood at $ 0.5/boe as of March 2005 However, ONGC has an active acquisitive / growth strategy through expanding into forward integration projects as well as acquiring oil / gas assets overseas. These developments raise event and execution risks. As the company implements its growth program, Moody's expects financial leverage to gradually increase, but to remain appropriate for the rating. The ratio of (RCF - maintenance capex) / debt is expected to remain above 50% over the medium term. Large acquisitions that reduce the ratio below this level could pressure the rating.

Moody's considers that the overhang of policy uncertainty, particularly regarding the subsidy-sharing mechanism and controls over natural gas prices, exposes ONGC to significant regulatory risks. Its state-owned status also raises the risk of potential government interference.

Most of ONGC's oil productions are sold to India's 3 major domestic public-sector refining companies, Indian Oil Corp Ltd. (foreign currency issuer rating of Baa3/stable), Bharat Petroleum Corp Ltd. and Hindustan Petroleum Corp Ltd. Almost all gas production is sold to GAIL India Ltd.

As such, the company faces relatively high customer concentration risk. In addition, ONGC has limited track record in exploratory success and reserve replacement, although the company is implementing enhanced recovery methods to improve its performance.

The stable outlook reflects the stable industry outlook and Moody's expectation that ONGC will maintain strong credit protection measures over the next 12-24 months. Moody's does not expect regulatory policies for the industry to substantially diverge from the existing scheme in the short term.

The local currency issuer rating has not factored in legal subordination as ONGC intends to decrease secured debt to below 15% of total consolidated debt over the next 1-2 years.

The indicative foreign currency debt rating incorporates all the above and the convertibility risk, which is the likelihood of the government declaring a debt moratorium to counter a foreign currency crisis.

As such, ONGC's indicative foreign currency debt rating is a function of its own risk of default (as indicated by its A2 local currency issuer rating), the probability of an India government default on its foreign debt (implied by its Baa3 rating), the likelihood that the government would declare a moratorium in the event of a default and, if it did, the chances that it would exempt a company such as ONGC.

Upward rating trend could evolve over time if 1) ONGC successfully implements its expansion plans; 2) establishes a solid track record in managing its overseas investments and achieves good diversification over time; and 3) maintains a strong financial profile and liquidity position. The upside potential for the rating, however, is limited, given the regulatory overhang and risks related to the company's overseas acquisition activities.

On the other hand, the rating may experience downward pressure if 1) major adverse changes occur in the regulatory scheme; or 2) the company undertakes aggressive acquisition transactions which substantially weaken its financial profile. Credit metrics that Moody's would look for include adjusted debt / proved developed reserves exceeding US$2/boe and (RCF - maintenance capex) / adjusted debt falling below 50%. In addition, deterioration in the domestic downstream petroleum sector, such as a downgrade in the rating of Indian Oil Corp Ltd, could also pressure the rating. ONGC is an Indian state-owned and publicly listed oil and gas company. It has 7.1 billion boe of proven oil and gas reserves and produced 438 million boe of crude oil / gas in FY2005. The government owns 74% of ONGC.

First Published: Feb 01, 2006 13:22 IST