Standard & Poor's Ratings Services said that it had assigned its 'BBB' long-term issue rating to the proposed issues of U.S. dollar senior unsecured notes by Reliance Holding USA Inc. Reliance Industries Ltd. (RIL; BBB/Positive/--), which indirectly owns all of Reliance Holding, will fully and unconditionally guarantee the notes. Reliance Holding will use the proceeds to fund ongoing capital expenditure in the shale gas business and to refinance short-term debt incurred for that business. The rating is subject to review of the finalized issue documentation and verification of details.
The rating on RIL reflects the company's large scale, integrated and efficient oil refining and petrochemical operations, and good business diversity. In addition, the company has stable cash flows and low leverage with strong liquidity. The following weaknesses offset these strengths: RIL's vulnerability to the cyclical nature of its industries and commodity prices; its exposure to India's country and regulatory risks, particularly for gas-producing blocks in the Krishna Godavari basin (KG D6); declining gas production from KG D6; and RIL's aggressive growth strategy.
S&P expect RIL to maintain its strong financial ratios in the fiscal year ending March 31, 2012 (fiscal 2012). Payments from BP PLC (A/Stable/A-1) for a stake in RIL's gas blocks will offset RIL's weaker operating performance than in fiscal 2011 and potential cash outflow due to a share buyback plan. We anticipate that RIL's ratio of adjusted debt to EBITDA will remain less than 1.5x compared with 1.4x for fiscal 2011. We adjust RIL's debt to factor in the company's cash and cash equivalents after netting Indian rupee (INR) 75 billion that we believe RIL needs for its operations. The use of this cash will largely determine the improvement in RIL's financial strength.
The positive outlook reflects our expectation that funds from BP will strengthen RIL's financial performance. The outlook also reflects our view that RIL's partnership with BP will help preserve its competitive position in the exploration and production business, and support operating performance and investments.
S&P could raise the rating if: (1) we have clarity on RIL's business strategy, especially its use of its significant cash balances; (2) we expect the company to maintain a modest financial risk profile with limited negative discretionary cash flows, such that the ratio of adjusted debt to EBITDA is less than 1.5x; and (3) the company significantly reduces its country and macroeconomic exposure to India.
S&P could revise the outlook to stable if a shift in RIL's growth strategy or a change in its shareholder distribution policy results in the company's ratio of adjusted debt to EBITDA exceeding 2x. We could also revise the outlook if: (1) RIL makes a large investment in a regulated business in India, such as financial services, or in a non-core business where the company has no record; or (2) we lower India's transfer and convertibility assessment to 'BBB' from 'BBB+'.