On the heels of upgrading India’s Sovereign debt Ratings, Moody’s Investors Services on Monday assigned a Baa2 rating to proposed US dollar-bond issue of Reliance Industries Ltd (RIL).

This global rating agency has pegged the rating outlook for these bonds as ‘stable’.

Generally, when a corporate entity raises money abroad, its rating (corporate) gets capped to the sovereign’s rating. With India’s sovereign rating going up a notch higher to Baa2 recently, RIL is set to become the first corporate to benefit in terms of better terms for this proposed offshore bond offering for which it has got Baa2 from Moody’s, say bankers and economy watchers.

RIL is expected to use the bond proceeds — estimated at about $800 million — for refinancing (replace high cost debts with a lower interest rate debt).

Mukesh Ambani-controlled RIL has embarked on a massive debt refinancing exercise and is expected to raise $1.8 billion through both offshore bonds and syndicated loans.

It may be recalled that RIL had recently informed the bourses that it was looking at issuing senior unsecured fixed rate notes of $800 million in a transaction not subject to, or exempt from, registration requirements under the US Securities Act of 1933.

The proposed issue was to commence on the week beginning November 20 (Monday) or any day thereafter, depending on market conditions, RIL had said in its filing with the stock exchanges.

Ratings rationale

Commenting on the RIL bond rating, Vikas Halan, Moody’s Vice-President and Senior Credit Officer, said that RIL’s Baa2 ratings reflects the company’s strong ability to generate operating cash flows, with annual EBIDTA exceeding $10 billion from its large-scale integrated refining and petrochemical operations — which generate strong margins — and the company’s nascent but growing digital services business.

Moody’s also said that the proposed bond will rank pari-passu with all of RIL’s other existing and future unsecured and unsubordinated obligations.

Halan, who is also Moody’s lead analyst for RIL, said that the Baa2 rating also incorporates the increase in RIL’s business risk because of its growing digital services segment “and our expectation that the high cash outflow for capital spending will keep its free cash flow negative over at least next 18 months”.

Even though RIL’s projects in the refining and petrochemical segments are nearing completion, the cash outflow for capital spending will remain high as payments to creditors for past capital expenditure are made over the next 12-18 months, according to Moody’s. Such payments along with additional capital spending in the digital services business will constrain any reduction in net borrowings until fiscal ending March 2019, the global rating agency said.

Retained cash flow (RCF)/adjusted net debt improved to 16 per cent in fiscal 2017 from about 14 per cent in fiscal 2016, but remains weak for its ratings.

Moody’s anticipates that RIL’s RCF/adjusted net debt should improve to above 20 per cent in fiscal 2018, a level which would be appropriate for its ratings.

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