MUMBAI: Moody’s Investors Service has downgraded the local currency rating of ONGC and GAIL. However, it retained stable outlook for these companies.
ONGC has been downgraded to Baa1 from A2 and GAIL to Baa2 from A3.
The rating reflects Moody’s view that both ONGC and GAIL cannot be completely de-linked from the credit quality of the Government (Baa3, stable), and thus their ratings need to reflect the risk that they share with the sovereign.
The rating agency said that there has been no deterioration in the intrinsic credit quality in ONGC and GAIL. Both companies are still viewed as Government-related issuers. However, a weaker sovereign has the potential to create a ratings drag and, therefore, it is appropriate to limit the extent to which these issuers are rated.
The agency pointed out that the transmission of credit risk from a sovereign to issuers domiciled in that country was made evident during the global financial crisis of 2008 and reinforced more recently during the European sovereign crisis.
ONGC and GAIL are predominantly domestic entities. While GAIL generates its entire revenue fromIndia, it is 85 per cent for ONGC. Government owns 69 per cent in ONGC and 57 per cent in GAIL.
Moody’s has narrowed the notching gap between the sovereign and these entities to better reflect this long-term transmission of credit risk.
Both issuers remain rated above the sovereign as a reflection of their stronger credit quality, but the gap is smaller than before, Moody’s said.
“In order to be rated significantly above the sovereign, an issuer needs to not only be fundamentally stronger than the sovereign from a credit perspective, but also demonstrate a degree of insulation from the domestic macro-economic and financial disruption, which generally accompanies a sovereign default, said Mr Vikas Halan,” Vice-President and Lead Analyst, Moody’s.
“We continue to take into account ONGC’s superior fundamental credit quality, evidenced by its low debt and strong liquidity, and position its rating two notches above the sovereign’s rating.
“However, we believe de-linking it further from the sovereign is not appropriate because of the 69 per cent ownership by the Government and the material exposure to domestic business, banks and counterparties,” Mr Halan said.