Moody’s Investors Service has downgraded the corporate family rating of HPCL-Mittal Energy Ltd to Ba2 from Ba1, and changed its outlook on the rating to stable from negative. The rating was downgraded due to weak refining margins arising from a slump in fuel demand, it said in a statement.
“The downgrade to Ba2 reflects the deterioration in HMEL’s credit metrics, driven by the weak refining environment in Asia as well as the company’s expansion into petrochemicals, which has kept HMEL’s borrowings at elevated levels,” said Sweta Patodia, a Moody’s analyst.
The weak industry conditions are reflected in the Singapore benchmark refining margins, which declined to around USD 3.7 per barrel for 2019 compared to its historical average of USD 6-7 a barrel.
“This decline in the benchmark was due to the extremely weak fuel oil spreads, which in turn were driven by International Maritime Organization’s new regulation restricting the use of heavy fuel oil in marine transportation,” it said.
Also, the credit metrics of HPCL-Mittal Energy Ltd (HMEL) was impacted by its ongoing expansion into petrochemicals which has led to an increase in its borrowings.
The company, which operates an 11.3 million tonnes a year oil refinery at Bhatinda in Punjab, is in the process of setting up a dual-feed petrochemical capacity of 1.2 million metrics tons per annum (mtpa).
The project, which commenced in October 2017, was originally planned to be completed by March 2022. However, the company now intends to complete it by April 2021, accelerating its capital spending and keeping its borrowings at elevated levels.
Moody’s said there have been no material cost overruns so far and the total project cost continues to largely remain within management’s initial estimates.