Progress On BPCL Privatisation, But Need For Further Clarity: Fitch Ratings

Fitch Ratings on Friday said there is more visibility on BPCL privatisation, but there is still little information on potential restrictions for the new owner in relation to employee protection, asset stripping, and investment lock-in.

Also, there is a need for further clarity on the future of subsidies paid to BPCL's customers on the sale of LPG and kerosene as well as the freedom on the pricing of petrol and diesel before the divestment can conclude, it said.

The government is selling its entire 53.98 per cent stake in India's second-largest fuel retailer Bharat Petroleum Corporation Ltd (BPCL). Three firms, including Vedanta Ltd, have evinced interest in buying the stake.

"There is more visibility on the progress of the state of India's divestment of BPCL, following developments on key queries raised by potential buyers, but multiple steps of the process remain outstanding and there are still questions that require further clarity," Fitch Ratings said in a statement.

Stating that it will continue to monitor the situation and consider suitable rating action as and when there is progress, it said watched closely is the progress on interested parties receiving security clearances from the government, access to the data room, the start of due diligence process and submission of financial bids.

BPCL has made headway on a key pre-condition to its divestment and other key milestones over the last six weeks, including the finalisation of terms to purchase Oman Oil Company's 36.6 per cent stake in its Bina refinery for Rs 2,400 crore in February 2021.

It also sold 5.8 per cent of its 7.3 per cent treasury shares for Rs 5,500 crore and approved the sale of its 61.7 per cent stake in Numaligarh Refinery Limited for Rs 9,900 crore in March.

"This results in net proceeds of Rs 13,000 crore for BPCL, less the long-term capital gains tax, although the timing of each transaction may vary," Fitch said, adding the impact on BPCL's Standalone Credit Profile (SCP) will depend on the extent to which the proceeds are used to reduce debt or make dividend payments in the coming year.

BPCL declared an interim dividend of Rs 1,100 crore on March 16.

"However, there is still little information about bidders, valuations or potential restrictions for the new owner in relation to employee protection, asset stripping and investment lock-in," it said.

"Fitch is also monitoring the progress on interested parties receiving security clearances from the government, access to the data room, the start of the due diligence process, reserve-price disclosure by the government, the submission of financial bids by bidders and the solicitation of lenders' consent should a winning bid be selected."

BPCL's bonds, which had USD 2 billion outstanding as of end-2020, will need to be refinanced or the holders' consent solicited, should the government accept a winning bid triggering the change of control clause.

"We believe the extent of refinancing or consent will depend on BPCL's rating at the time. We do not expect the government to halt the sale should it be dissatisfied with the financial bids, given its budgeted disinvestment target and strongly articulated intent, but this could prolong the process," it said.

Fitch said there is a need for further clarity on the future of subsidies paid to BPCL's customers on the sale of liquified petroleum gas and kerosene as well as the freedom on the pricing of petrol and diesel before the divestment.

The government has traditionally used oil marketing companies, including BPCL, to carry out its socio-political agenda, but private companies may be less inclined to bear such regulatory risk.

"The sale of the government's entire shareholding in BPCL would lead to a reassessment of BPCL's ratings, based on a reassessment of its SCP and the nature of the potential buyers, including the credit quality of any majority parent and Fitch's assessment of the strength of linkages between the new parent and BPCL," it added..