ONGC Videsh dollar bonds issue gets low ratings from Moody’s

New Delhi : American rating agency Moody’s on Thursday assigned low investment grade ratings to a US dollar bonds issue of Indian explorer’s oversaes arm ONGC Videsh to fund its acquisition of 15 per cent stake in Russia’s Vankor oilfields.

“Moody’s Investors Service has assigned a Baa2 rating to the proposed foreign currency senior unsecured bonds to be issued by ONGC Videsh Vankorneft Pte Ltd (OVVPL), a wholly-owned subsidiary of Oil and Natural Gas Corporation (ONGC),” Moodys said in a statement here.

“The proposed foreign currency bonds are rated at the same level as ONGC’s foreign currency issuer ratings because the bonds are unconditionally and irrevocably guaranteed by ONGC and the guarantee is pari passu to all senior unsecured obligations of ONGC,” it said.

“The ratings outlook is stable,” Moody’s added.

ONGC Videsh expects to use the proceeds of the proposed issue to refinance existing bridge loans incurred to acquire a 15 per cent stake in CJSC Vankorneft for $1.26 billion.

ONGC, Oil India, Indian Oil Corp and Bharat Petroleum will collectively own a 49.9 per cent stake in Rosneft’s Vankor field, and a 29.9 per cent stake in Rosneft’s Tass-Yuryakh field at a total cost of up to $5.4 billion.

Noting ONGC’s production is concentrated in India while its expansion outside is in higher-risk countries, Moody’s said the state-run explorer is also exposed to negative government intervention, such as sharing of oil subsidies.

“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 ONGC’s part to restrict its liability under the bonds,” said Moody’s vice president Vikas Halan.

Moody’s said ONGC’s issuer ratings incorporate expectation that the impact of declining oil prices on the company’s cash flows will remain low because the company benefits from a lowering of fuel subsidies, a reduction in taxes and improved contributions from its downstream business.

“Even if we incorporate the Vankor acquisition (including the 11 percent stake yet to completed) we expect ONGC’s RCF to debt ratio to remain in excess of 50 per cent over the next 12-18 months, a level that is well within our tolerance level for the company’s Baa1 ratings,” Halan said.

The agency said ONGC’s liquidity position is strong, with cash and cash equivalents of Rs 25,800 crore, as against debts of Rs 9,600 crore maturing over the next 12 months.

Moreover, the company’s investments in listed entities can realise at least Rs 8,000-10,000 crore without any disruption to its ongoing business, it added.

“ONGC’s Baa1 local currency issuer rating is constrained to within two notches of India’s sovereign rating (Baa3 positive) and its Baa2 foreign currency issuer rating is constrained by the country ceiling for foreign currency bonds,” Moody’s said.