(ADPnews) - Jan 17, 2011 - India's CARE on Friday reaffirmed its PR2 (SO) rating assigned to the short-term bank facilities of Essar Oil Ltd (BOM:500134).
The agency issued the following press release:
Facilities/Instruments Amount(Rs. crore) Ratings Remarks
Short-term Bank Facilities 1,200.00 aPR2 (SO)' [PR Two Reaffirmed
(Invoice Discounting Facilities) (Structured Obligation)]
Total Facilities 1,200.00
The rating for the short term bank facilities derives strength from the credit quality of the underlying receivables and the escrow structure that has been implemented by Essar Oil Ltd. (EOL), to service the liability towards HDFC Bank arising out of discounted invoices. The credit rating is subject to EOL ensuring compliance with the escrow structure. The rating is constrained by the structure not being bankruptcy remote.
Brief on EOL
Essar Oil Limited (EOL, Rated CARE BBB- and PR3), incorporated in 1989, is part of the Essar Group, which is a conglomerate having business interests in various core sectors like telecom, steel, power, shipping, construction and petroleum. EOL's holding company Essar Global Ltd (EGL) along with its subsidiaries and associates (promoters) as on March 31, 2010 holds 89.96% in EOL. EOL deals in Exploration and Production, Refining & Marketing and Distribution and as on March 31, 2010, had oil refining capacity of 10.5 million metric tonnes per annum (mmtpa) with a Nelson Complexity Index (NCI) of 6.1, at Vadinar, Gujarat.
Transaction Structure
EOL procures crude in limited tranches whereas its receivables are spaced out. With payments to its suppliers being bunched, the company has entered into an invoice discounting arrangement with HDFC Bank (HDFC), to manage its cash flows effectively. It thus discounts its invoices with HDFC and utilizes the proceeds towards payment of its working capital liabilities like honouring LCs towards crude payments besides other purposes as specified in the CDR waterfall mechanism.
As per the structure, all the receivables from HPCL, flow to the designated HDFC collection account, which is a ano cheque book account'. After settling dues towards outstanding invoices discounted with HDFC, the balance is transferred by HDFC to the Working Capital Sub-TRA (Trust and Retention Account Agreement) account of EOL maintained with HDFC. As per the off-take agreement with HPCL, HPCL is required to pay the basic price for the product sold by EOL on 21st day of the date of completion of delivery, and also has an additional grace period of 15 days thereafter. Payment of terminal charges for the month is to be made to EOL on 10th of the subsequent month. Payment of Excise duty is to be made on 6th of the next month and payment of Local Sales tax/VAT on 12th of next month for Motor Spirit (MS) & High Speed Diesel (HSD) & Aviation Turbine Fuel (ATF) and 22nd of the following month for other products. During the interim period, HDFC faces credit risk on quality of underlying receivables of HPCL.
Obligor Profile
HPCL is a five decade old Fortune 500 company and a Government of India (GoI) undertaking with a aNavratna' status. It is an integrated refining and marketing oil company in India with a market share of 16% in refining and marketing.
On a total income of Rs.1,13,300 crore, HPCL earned a PAT of Rs.1,301 crore in FY10. Its brief financials are tabulated below:
For the year / As on March 31 2008 2009 2010
Net Sales 1,08,756 1,24,814 1,13,300
PBILDT 2,726 3,776 4,193
PAT 1,135 575 1,301
Gross cash accruals 1,986 1,556 2,466
PBILDT/Total Income (%) 2.59 2.85 3.62
PAT/Total Income (%) 1.04 0.46 1.15
Interest Coverage (times) 2.71 1.34 3.35
LT Debt/Equity ratio (times) 1.00 1.45 1.48
Overall Gearing ratio (times) 1.35 1.86 1.98
Current Ratio (times) 0.94 0.98 0.86
Other issues
HDFC Bank is a consortium member but not a secured lender to the extent of the invoice discounting limit offered by it to EOL as invoices are not negotiable instruments and hence they are not transferable by endorsement and delivery. Therefore, the possessor (HDFC) does not have title to the invoices. Nevertheless, the legal opinion received by CARE states, aas the other secured lenders have already received the monies on discounted invoices, they should not have a charge on the discounted invoices againa.
(INR 100 = USD 2.194/EUR 1.646)
(crore = 10 million)
Rating agency website: www.careratings.com
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