Moody's downgrades ratings of ONGC, GAIL

Credit rating agency Moody's has downgraded the local currency ratings of state-owned Oil and Natural Gas Corporation (ONGC) and GAIL, as a reflection of the risks that these two entities share with the Indian government.

Moody's Investors Service has downgraded the local currency rating of ONGC to Baa1 from A2 and that of GAIL to Baa2 from A3. The outlook for both ratings is stable.     

"The rating actions reflect Moody's view that both ONGC  and GAIL ultimately cannot be completely de-linked from the credit quality of the Indian government (Baa3, stable), and thus their ratings need to more closely reflect the risk that they share with the sovereign," Moody's said in a statement.

However, there has not been any deterioration in the intrinsic credit quality of either ONGC or GAIL, Moody's said.     

Both issuers are still 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 not only be fundamentally stronger than the sovereign from a credit perspective, but also demonstrate a degree of insulation from the domestic macroeconomic and financial disruption," Moody's Vice President and Lead Analyst for ONGC Vikas Halan said.

ONGC gets over 85 per cent of its revenue from India and GAIL gets almost 100 per cent. Besides, both the firms have a high degree of direct government ownership (69 per cent for ONGC and 57 per cent for GAIL).     

"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 higher than the sovereign, in line with Moody's Rating Implementation Guidance," Moody's said.

Domestic business concentration, banking/counterparty relationships, and government ownership and control are key channels for the transmission of credit stress, Moody's said.

"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," Halan said.

It added that de-linking it further from the sovereign is not appropriate because of the 69 per cent government ownership and the material exposure to domestic business, banks and counterparties.

Regarding GAIL, Moody's Assistant Vice President Ray Tay said GAIL's financial profile is sufficiently strong to allow its ratings to be one notch above the sovereign.

"However, with more than half of its EBITDA still coming from regulated local lines of businesses, where the reliance  on the government is high, government ownership of 57 per cent, and a material exposure to local counterparties, it is not appropriate for GAIL to be rated more than one notch above the sovereign," Tay said.

Moody's further noted that the rating actions are not an indication of deteriorating sovereign risk; the sovereign rating remains unchanged at Baa3 with a stable outlook.

However, any downward rating action at the sovereign level would likely result in negative rating actions at both ONGC and GAIL, Moody's said.

ONGC is India's flagship exploration and production firm, accounting for 75 per cent of the total proved reserves in India.

GAIL is the largest natural gas transmission company in India, with interests in transmission, distribution, processing, and downstream petrochemicals.