MF’s Rs 350-cr debt exposure in HPCL-Mittal Energy in focus as Moody’s downgrades rating

As many as nine schemes including Franklin India Ultra Short Bond have between 1-11% exposure individually to the company

Kumar Shankar Roy Mar 2, 2020

Ratings downgradeRatings major Moody’s Investors Service has downgraded the corporate family rating (CFR) of HPCL-Mittal Energy Limited (HMEL) to Ba2 from Ba1. Moody’s has also downgraded HMEL’s senior unsecured bond rating to Ba3 from Ba2. Importantly, obligations rated Ba are judged to be speculative and are subject to substantial credit risk. The rating action has ramifications for the Rs 350-crore market value of debt securities in a total of nine debt mutual fund schemes including Franklin India Ultra Short Bond Fund-Super Inst and L&T Credit Risk Fund. Read on.

Downgrade event

HMEL is privately owned and its ownership is concentrated in HPCL and Mittal Energy Investments, which each hold a 48.99% stake. The remaining 2.02% is held by financial institutions (IFCI – 0.96%, SBI – 0.65% and HDFC Life – 0.4%). On February 25, Moody’s downgraded the corporate family rating (CFR) of HPCL-Mittal Energy to Ba2 from Ba1. Moody’s has also downgraded HMEL’s senior unsecured bond rating to Ba3 from Ba2. At the same time, Moody’s has changed the outlook on the rating to stable from negative.

“The downgrade to Ba2 CFR 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 “says, Sweta Patodia, a Moody’s Analyst.

HMEL’s Ba2 CFR incorporates a two-notch uplift based on Moody’s expectation that the company will receive extraordinary support from its shareholder and key off-taker, HPCL. This reflects HMEL’s strategic importance to HPCL, its 48.99% ownership by HPCL, as well as HPCL’s management oversight and track record of providing financial and operational assistance to HMEL.

Kindly note that Moody’s rates HMEL peers like IOC (Baa2), RIL (Baa2) and BPCL (Baa2). Obligations rated Baa are judged to be medium-grade
and subject to moderate credit risk. They are better than Ba rated obligations.

On 31 March 2019, 73% of the total debt in HMEL’s capital structure was secured. As such, the claims of bondholders are subordinated to those of secured lenders. Consequently, Moody’s rates the company’s senior unsecured bonds one notch below its CFR.

As of 31 December 2019, HMEL had cash and cash equivalents of Rs 7.9 billion which along with expected cash flow from operations of around Rs 26-27 billion will be sufficient to cover routine capital expenditures of around Rs 10.6 billion and Rs 9.3 billion of debt maturities over the next 12 months, Moody’s said.

Moody’s said it is unlikely to upgrade the ratings until HMEL completes its ongoing expansion and successfully ramps-up its petrochemical plant. HPCL-Mittal Energy Limited, which commenced operations in 2011, owns an 11.3 million metric tonnes per annum (mmtpa) refinery in Bathinda, Punjab.

Interestingly, a separate ratings agency India Ratings and Research (Ind-Ra) on January 28 had affirmed HPCL-Mittal Energy Limited’s (HMEL) Long-Term Issuer Rating at ‘IND AA+’ and also said the outlook is ‘stable’.

Debt MF exposure

As many as 9 debt mutual fund schemes, including 6 closed-end schemes, have debt securities worth Rs 352 crore (as on Jan 31) of HPCL Mittal Energy Ltd in their respective portfolios.

In value terms, Franklin India Ultra Short Bond Fund-Super Inst has the highest exposure to HPCL-Mittal Energy at Rs 114.4 crore, followed by Kotak FMP-239-1330D Rs 70.2 crore, HDFC FMP-Sr 42-1487-Aug 2018(1) Rs 62.9 crore, L&T Low Duration Fund Rs 35.2 crore and HDFC FMP-Sr 42-1141D-Aug 2018(1) Rs 26.1 crore amongst notable mentions.

In % exposure of fund AUM terms, Kotak FMP-234-1162D has the highest at 11.27%, followed by HDFC FMP-Sr 42-1141D-Aug 2018 (1) at 10.98%, Kotak FMP-239-1330D at 10.45%, HDFC FMP-XXVII-1846D-Aug 2013(1) at 9.47% and HDFC FMP-Sr 42-1487-Aug 2018 at 9.37% among notable mentions.

Fund exposure to HPCL Mittal debt

Fund Name Fund AUM (in Rs Cr) % of AUM Value (in Rs Cr)
Kotak FMP-234-1162D 103.8 11.27 11.7
HDFC FMP-Sr 42-1141D-Aug 2018(1) 237.7 10.98 26.1
Kotak FMP-239-1330D 671.8 10.45 70.2
HDFC FMP-XXVII-1846D-Aug 2013(1) 205.2 9.47 19.4
HDFC FMP-Sr 42-1487-Aug 2018(1) 671.7 9.37 62.9
HDFC FMP-Sr 43-1344D-Oct 2018(1) 69.8 4.9 3.4
L&T Low Duration Fund 890 3.95 35.2
Franklin India Ultra Short Bond Fund-Super Inst 16098.6 0.71 114.4
L&T Credit Risk Fund 1728.2 0.51 8.8

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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