Reliance Industries' Proposed Reorganisation to Create O2C Subsidiary Is Credit Neutral: Fitch
Reliance Industries Ltd (RIL) has announced a reorganisation plan to transfer its refining, marketing and petrochemicals (oil-to-chemicals) businesses to a wholly-owned subsidiary, Reliance O2C Limited (O2C), as a step towards facilitating participation by strategic investors in its O2C businesses. The reorganisation will have a neutral impact on RIL's credit metrics and rating, says Fitch Ratings.
According to Fitch, the proposed reorganisation eases the formation of strategic partnerships and stake sales to potential investors focused on investments in oil-to-chemicals businesses. RIL has been in ongoing discussions with Saudi Arabian Oil Co (Saudi Aramco) to sell a minority stake in its oil-to-chemicals businesses, which, if successful, should lead to further deleveraging of RIL, it added.
As per the plan, the transfer will be on a 'slump sale basis', subject to attaining the requisite approvals. The consideration for the transfer will be in the form of long-term interest-bearing debt of $25 billion to be issued by O2C to RIL while RIL's external debt is proposed to remain with RIL only.
As RIL moves its oil refining, petrochemicals and 51% stake in a fuel retail subsidiary—among other businesses—to O2C, it will continue to hold businesses like textiles and upstream oil & gas, and will act as an incubator for new growth businesses.
Following the reorganisation, Fitch says, the risk of any cash-flow subordination should be mitigated by RIL's significant majority control in its key subsidiaries along with its strong liquidity, minimal external debt at the subsidiaries' levels, and overall low consolidated leverage position.
RIL holds 67% in its digital services and 85% in retail business subsidiaries, and aims to maintain a significant majority stake in O2C, which provides significant control and access to cash flows generated by these businesses.
According to the ratings agency, long-dated loans issued by O2C to RIL, as part of the reorganisation, will provide an efficient mechanism to upstream cash generated from O2C to RIL.
Furthermore, RIL plans to retain most of the existing cash of $30.2 billion (as of end-December 2020) at the parent level, thereby supporting liquidity.
"The cash balance has benefited from the proceeds of Rs1.5 trillion (or about $20.8 billion) from the sale of a 33% stake in digital services, Rs0.5 trillion (or around $6.5 billion) from the sale of a 10% stake in its retail subsidiaries and part of the proceeds from RIL's Rs0.5 trillion (about $7.3 billion) rights issue," Fitch says.
The ratings agency says it does not expect any change in RIL's consolidated adjusted net leverage, which is approaching zero amid declining capex.
"We expect RIL's liquidity at the parent level to remain strong. This would be assisted further by cash upstreaming via interest and debt repayments on long-term loans from O2C in addition to potential dividends from its large subsidiaries," Fitch added.
As per a presentation on the proposed reorganisation of O2C business of RIL, the company says it has created 1.3 times more wealth for shareholders.
On the rationale for the reorganisation of O2C business, the company says RIL's unprecedented growth in the past decade has been driven by significant growth in O2C business and rapid scale-up of new consumer businesses—digital and retail.
"Strong underlying performance of each business has resulted in a strong and diversified growth and earnings profile. RIL has initiated the process of carving-out O2C Business into an independent subsidiary. Each business will pursue its own independent growth opportunities and create value," RIL says.
The approval process has commenced and is expected to be completed by second quarter (Q2) of FY21-22.