Moody's Investors Service has downgraded Nayara Energy Limited's rating to Ba3 from Ba2 and changed the outlook on the rating to negative from stable, it said in a statement today.
Russian oil giant Rosneft-led Nayara Energy operates a 20 million tonnes a year oil refinery at Vadinar, Gujarat.
"The downgrade to Ba3 reflects the significant deterioration in Nayara's credit metrics, driven largely by the weak refining margin environment in Asia," said Sweta Patodia, Moody's Lead Analyst for Nayara.
The weak industry conditions are reflected in the Singapore benchmark refining margins, which declined to around $4.9 per barrel for the fiscal year ending March 2019 (FY2019) from $7.2 per barrel in FY2018. The margins further declined to around $3.4 per barrel for the quarter ended June 2019.
The weakness in refining margins was attributable to weak product demand as well as a high differential between Brent and West Texas Intermediate (WTI) crude oil prices, which kept feedstock cost elevated for Asian refiners.
Nayara's operating performance was affected by a planned maintenance shutdown in December 2018, which resulted in lower throughput and capacity utilization during the period.
"In addition, the implementation of new accounting standards with respect to operating leases resulted in higher leverage and further weakened the company's credit metrics. Consequently, Nayara's leverage increased to approximately 6.3 times for the last twelve months ended 30 June 2019 from 3.9 times for fiscal year ended March 2018, and interest cover -- declined to 1.5 times from 2.1 times over the same period," added Moody's.
However, with the International Maritime Organisation's norms on the use of heavy fuel oil in the shipping industry from January 2020 in place, it will result in an increase in demand for middle distillates and thus lead to some recovery in refining margins. Moody's expects Nayara to benefit from the new regulations given its high proportion of light and middle distillate output.
In addition, the expansion of the company's fuel retail network along with the deployment of surplus cash towards debt reduction will support further improvement in its profitability and credit metrics. "While we expect Nayara's credit metrics to improve over the next 12-18 months, they will continue to remain weakly positioned," added Patodia.
However, Moody's expects the company's debt to improve to around 4.7 times by March 2021, while its interest cover will improve to around 1.8 times over the same period.