The rating agency has also downgraded a Rs 126-crore NCD issue of Essar Shipping Ltd (ESL) to triple-B plus (BBB+) from double-A minus (AA-). The revised rating indicates moderate safety on the instrument.

The revision in EOL's debt rating is mainly on account of escalation in project cost due to delay in commissioning of the project, increasing proportion of debt in the overall funding and a significant portion of funding remaining untied. Besides, due to the depressed oil prices, EOL's refinery margins are expected to come down, a Crisil release stated on Thursday.

These factors are partly offset by the favourable demand-supply gap for petroleum products in the country inthe medium term.

EOL is implementing a project for setting up a crude refinery with a capacity to process 10.5 million metric tonnes per annum of crude. The refinery was scheduled to go on stream in April, 1999. However, the site was affected badly by the cyclone which hit the Gujarat coast in June 1998 and the delay in commissioning is estimated to be 12 months.

The downward revision of ESL's rating is based on the increase in the risk profile of the company due to the transfer of the predominantly debt-funded terminal project from EOL to ESL and the expected impact of this on the financial risk profile of the shipping company.

The rating also factors in the dependence of ESL's cashflows on the refinery project being implemented by EOL and the decline in shipping charter rates in the backdrop of the expiry of a bulk of the company's old charters. These factors are partially offset by the strengths of the shipping business reflected in the relatively large, diversified and young fleet and the liquidnature of shipping assets.

Insight:

Fortunes of the two firms are linked

The fortunes of Essar Shipping are linked directly to those of Essar Oil. Recent moves such as securitising future receivables may have been a source of funding for Essar Oil, but tying up future receivables could mean that cash flows may be lower for other investors. In fact, the thought that there will be lower cash inflows to meet its obligations to other lenders in part also could also have prompted the downgrade. And downgrading one meant downgrading the other.