Detailed Rationale

CRISIL has reaffirmed its 'Provisional CRISIL AAAr(CE)/Stable' rating to the proposed compulsorily convertible debentures (CCD) of ONGC Mangalore Petrochemicals Limited (OMPL) which are yet to be placed. CRISIL has also reaffirmed its 'CRISIL AAAr(CE)/Stable/CRISIL A1+' ratings on other debt instruments and short term bank facility. The contract terms of the proposed instrument are similar to the terms of the existing CCDs rated by CRISIL.

 

On January 02, 2021, MRPL completed the acquisition of 49% stake in OMPL from ONGC for a cash consideration of Rs 1,217 crore thereby increasing its own stake to 99.99% from 51% earlier thus making OMPL a wholly-owned subsidiary of MRPL. Further, MRPL is in the process of amalgamating OMPL with itself and the entire process is expected to conclude by June/July 2021. CRISIL believes that the amalgamation would further benefit OMPL, considering MRPL’s healthier credit profile.

 

The ratings on CCDs is based on the irrevocable and unconditional credit enhancement extended by its sponsors i.e. Mangalore Refinery and Petrochemicals Limited (MRPL; rated 'CRISIL AAA/Stable') and Oil and Natural Gas Corporation Ltd (ONGC), for servicing the coupon payment on the CCD, and payment mechanism for the coupon payment administered by the debenture trustee.

 

According to the structure of the CCDs, the sponsors would either fund the service account or ensure that the coupon payment is deposited by OMPL, on or before the coupon payment date. While the debenture trustee shall issue a notice to the sponsor, one business day prior to each coupon payment date, to ensure timely deposit of funds in the service account; non issuance of such a notice does not relieve the sponsors obligations towards the same.

 

The undertaking to ensure timely servicing of coupon payments was agreed to be provided both by MRPL and ONGC, in the ratio of their respective shareholding in OMPL at the time of placing the CCDs i.e. 51% and 49% respectively. The payment structure is designed in a manner that ensures full and timely coupon payment to the investor.

 
Also, the agreement will remain unaffected even if OMPL faces bankruptcy, in case of a dissolution, insolvency, liquidation, or winding up proceedings initiated by or against the issuer.
 
The 'r' symbol attached to the assigned rating indicates that the principal payment on the rated instrument has non-credit risks. The terms of the instrument specify that the debenture will get converted into ordinary equity shares of OMPL at the end of 36 months and thereupon the returns on the instrument (post conversion into equity shares) will depend on price on the conversion date. As a result, the value of the equity shares thus converted may be different from the face value of the debentures (principal payment). 

 
However, till the time the put option in the hands of investors is in exercise, investors can draw comfort from the presence of an unconditional and irrevocable 'mandatory buy-out option' from the sponsors. As per the option, if the sponsors have not procured an Equity investor who has, or they by itself have not acquired the debentures from principal investors prior to the expiry of 35 months from deemed date of allotment, both MRPL and ONGC, in the ratio of 51% and 49% respectively, will mandatorily and without requiring further intimation, buy the outstanding debentures for the aggregate of face value of debentures and accrued but unpaid amounts including coupon, if any, at the end of 35th month from the deemed date of allotment. Since MRPL has acquired ONGC’s entire stake in OMPL, MRPL would be exercising an accelerated buy-out option to extinguish the CCD instruments, prior to the completion of the amalgamation process of OMPL with itself.

 

The 'provisional' rating will be converted to a 'final' rating once CRISIL receives following documents duly executed:

 

* Debenture Trust Deed

* Options agreement

* Service Account Agreement

* Final Term Sheet

 

The rating on the short-term debt and commercial paper programme continues to factor in the strong operational, managerial, and financial linkages that OMPL has with its parent, Mangalore Refinery & Petrochemicals Ltd (MRPL; 'CRISIL AAA/Stable').

 

These strengths are partially offset by a highly leveraged capital structure, weak debt protection metrics, and susceptibility of operating profitability to volatility in spreads between the pricing of the feedstock (naphtha) and the finished products, primarily paraxylene and benzene. An improvement in the operating performance is however expected hereon, with both MRPL and OMPL fully integrating their business operations with an aim to maximize the overall product yield.

 

Earlier, to augment the overall financial position, a capital realignment plan was undertaken during fiscals 2019 and 2020, wherein the sponsors had stepped in to provide additional liquidity support to OMPL. Also, to ease the liquidity position of the company, the tenure of foreign currency term loans amounting to USD 510 million have been extended for a period of three to eight years, as compared to six months previously. 

Analytical Approach

For the compulsory convertible debentures, CRISIL has applied its analytical approach of rating instruments backed by guarantee

 

For arriving at the rating of the bank loan and commercial paper programme, CRISIL has applied its criteria for notch-up of ratings based on parent support. 

Key Rating Drivers & Detailed Description

Strengths

• Creditworthiness of the current sponsors i.e. MRPL and ONGC

ONGC has a dominant position in the exploration, development and production of oil and gas sector, wherein it plays a leading role in bridging the gap between the domestic consumption and production of oil & gas and increasing import dependence. The Government of India (GoI) is the majority shareholder (holding around 63%) and ONGC functions under the administrative control of the Ministry of Petroleum and Natural Gas. CRISIL believes ONGC will remain strategically important to GoI, and will continue to play a key role in implementing the government's socio-economic policies. Any change in GoI's stance on strategic importance or loss of management control will constitute a key rating sensitivity factor.

 

The credit risk profile of MRPL also centrally factors in the strategic importance of the company to, and the strong support it receives from its parent, ONGC (holds 72% stake). With MRPL in the process of amalgamating OMPL with itself, the former would be exercising an accelerated buy-out option to extinguish the CCD instruments, prior to the completion of the amalgamation process.

 

• Strategic importance to MRPL

The company, being a wholly owned subsidiary, has a high strategic importance to and significant operational linkages with MRPL. OMPL provides flexibility to MRPL to maximise its yield by converting naphtha (finished product from MRPL's refinery) into a higher-value-added product and thus optimise its gross refining margin (GRMs). Both the entities have already initiated the business integration process with an aim to maximize the overall product yields.

 

Currently, not many changes are expected on the management front wherein both OMPL and MRPL would have the same Chairman. There are 3 directors from ONGC on OMPL’s board which is expected to continue over the medium term.

 

• Strong financial flexibility

OMPL also benefits from the strong financial flexibility it derives from being a part of the ONGC group; this helps to raise both short- and long-term loans at a short notice and at competitive rates.

 

Weaknesses 

• Weakened operating performance

Capacity utilisation was initially impacted by lower feedstock availability, which has gradually been improving by sourcing naphtha from other oil companies, apart from MRPL. Accordingly, the plant operated at a 99% utilisation during fiscal 2019. Plant utilisation levels again dropped to 80% in fiscal 2020, caused by a 30 day shutdown due to shortage of water in Mangalore and an additional 30 days shutdown to undertake its planned maintenance.

 

Along with a decline in utilisation levels in fiscal 2020, product realisations were also weak; cumulating to the company reporting EBITDA losses of Rs 700 crore (as compared to operating profits of Rs 938 crore reported in fiscal 2019). During first half of fiscal 2021, the company reported an operating revenue of Rs 1,008 crore wherein operating losses were Rs 40 crore. In Q1FY21, while the demand for paraxylene was subdued, the company started operating its plant under the reformate mode, which had a comparative favourable market position.

 

OMPL's operating profitability continues to remain susceptible to volatility in spreads between the pricing of feedstock (naphtha) and the finished products; wherein the product cracks are expected to remain soft over the medium term. 

 

• Leveraged capital structure and weak debt protection metrics

Use of debt to fund cost overruns, operating losses, and debt obligations have led to a leveraged capital structure. The company has been relying on refinancing to meet its repayment obligations. Capital structure should improve gradually, with improvement in capacity utilisation and gradual improvement of product cracks. To augment the overall financial position, a capital realignment plan (CRP) was undertaken during fiscals 2019 and 2020, wherein the sponsors had stepped in to provide additional liquidity support to OMPL. Apart from equity infusions, both ONGC and MRPL have also provided a backstopping support for Rs 1000 crore of CCDs issued in March 2020. Similar support is being extended for the proposed CCD issuance of Rs 1,000 crore. Also, MRPL has extended a credit period for supplies, which would be backed by a bill discounting in its books, amounting to Rs 1,500 crore. This would enable the company to reduce its external debt to some extent, while also improving OMPL’s financial risk profile over the medium term. Also as a part of the CRP undertaken, to further ease the liquidity position of the company, the tenure of foreign currency term loans amounting to USD 510 million have been extended for a period of three to eight years, as compared to six months previously. 

Liquidity: Superior

The rating is based on the irrevocable and unconditional credit enhancement extended by its existing sponsors i.e. MRPL and ONGC, for servicing the coupon payment on the CCD, and payment mechanism for the coupon payment administered by the debenture trustee. The parental support received from MRPL benefits OMPL’s financial flexibility, enabling it to access funding sources at attractive rates. OMPL also has access to fund-based limit of Rs 1,000 crore, which has been utilised at an average of 50%-60% in the 12 months through December 2020. The company has debt obligation of around Rs 300 - 360 crore per annum in fiscals 2021 and 2022. CRISIL believes that the dependence on refinancing would continue, to repay the debt obligations.

Outlook: Stable

The rating outlook on the CCDs reflects CRISIL’s outlook on the credit quality of the existing sponsors, MRPL and ONGC

Rating Sensitivity factors

Downward Factors

• Deterioration in the credit rating of MRPL by one notch or more
• Deterioration in credit profile of ONGC
• Any change in the support philosophy of the sponsors towards OMPL

 

Rating sensitivity factors (For the bank loan facilities and commercial paper)

Downward Factors

• Deterioration in the credit rating of MRPL by one notch or more
• Higher-than-expected and sustained deterioration in OMPL’s standalone performance

Adequacy of credit enhancement structure

The sponsors have provided an unconditional and irrevocable credit enhancement for the coupon payment of the CCDs; in the ratio of their equity holding in the company. The buy-out option to be exercised at the end of the 35th month, is to be mandatorily exercised by the sponsors for the entire outstanding debenture amount.

Unsupported ratings: CRISIL AA+

CRISIL has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature, in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL has applied its criteria for notch-up of ratings based on parent support. 

 

The unsupported rating has been upgraded to CRISIL AA+ from CRISIL AA earlier to factor the completion of stake take-over by MRPL and CRISIL expects a further improvement in OMPL’s credit risk profile, with the completion of the amalgamation process with MRPL. The same is expected to benefit both OMPL and MRPL given the operational synergies between their operations.

About the Company

Incorporated in 2006, OMPL was promoted by MRPL (51% equity stake) and ONGC (49%). On January 02, 2021, MRPL announced the completion of taking over ONGC’s stake in OMPL, thus making OMPL its wholly-owned subsidiary. MRPL is now in the process of amalgamating OMPL with itself, the entire process of which is expected to conclude by June/July 2021.

 

OMPL’s plant commenced commercial production in October 2014. The company’s complex is situated over 442 acres of land in the Special Economic Zone at Mangalore, Karnataka, and is fully integrated with MRPL. It utilises feedstock (naphtha and aromatic rich streams) from MRPL's refinery which is adjacent to the plant. The plant has an installed capacity to process 914 kilo tonne per annum (ktpa) of paraxylene and 283 ktpa of benzene, along with other by-products being used either for captive consumption as a fuel or sold back to MRPL.

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs crore	4,861	8,362
Profit after tax	Rs crore	-1400	23
PAT margin	%	-28.3	0.3
Adjusted debt/Adjusted networth	Times	6.95	10.26
Interest coverage	Times	-1.39	1.64

 

List of covenants

Particulars	Timeline	Event
Coupon payment	T-1 day	One Business Day prior to each Coupon Payment Date, the Issuer will fund the Service Account equal to the requisite amount of coupon payment due; One Business Day prior to each Coupon Payment Date, the Debenture Trustee shall issue a notice to the sponsor, requesting to deposit or ensure that the Issuer deposits into the Service Account the requisite amount due, on the relevant coupon payment date Notwithstanding anything contained in the transaction documents, non-submission of the notice by the debenture trustee shall not affect the obligation of the sponsor and/or the issuer to deposit into the service account the required coupon amount
	T day	Coupon payment to be made to the investor based on the funds deposited in the Service Account.
Principal repayment	Mandatory buy-out option	At the end of the 35th month, the buy-out shall be mandatorily exercised by the sponsor for the entire outstanding debentures amount The mandatory buy-out shall be binding on the sponsor and not optional in nature and shall not be dependent on any notice being delivered by the sponsor

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs cr)	Complexity level	Rating assigned with outlook
NA	Commercial paper	NA	NA	7-365 days	3500	Simple	CRISIL A1+
INE053T08016	Compulsory Convertible Debenture	Mar-20	8.35%	Mar-23	250	Complex	CRISIL AAAr(CE)/Stable
INE053T08032	Compulsory Convertible Debenture	Mar-20	8.75%	Mar-23	500	Complex	CRISIL AAAr(CE)/Stable
INE053T08024	Compulsory Convertible Debenture	Mar-20	8.50%	Mar-23	250	Complex	CRISIL AAAr(CE)/Stable
NA	Compulsory Convertible Debenture*	NA	NA	NA	1000	Complex	Provisional CRISIL AAAr(CE)/Stable
NA	Short Term Loan	NA	NA	NA	1000	NA	CRISIL A1+

*Yet to be placed