In his most recent rating on Ecopetrol, Moody’s Investors Service decided to maintain Ecopetrol’s senior ratings at Baa3. However, it lowered the oil company’s benchmark credit assessment (BCA) from ba1 to ba3.
(Moody’s lowered Ecopetrol’s base credit risk assessment).
Although this drop in the item does not affect the long-term credit rating (Baa3), which is the main factor that investors take into account when putting their money in a company or a country, the base credit evaluation warns about the “likelihood that an issuer will require extraordinary support to avoid defaulting on one or more of its debt obligations or incurring in default on one or more of its debt obligations, in the absence of such extraordinary support”.
In other words, after its evaluation, it sounds an alarm about the intrinsic financial solidity of a company to meet the payment of its debts.
“Risk rating agencies evaluate long-term or medium-term debts, depending on the characteristics of the evaluation, and determine the probability of paying these debts. So, the higher the risk, the less likely it is that companies will pay their obligations”explains Jeisson Balaguera, executive director for Values AAA and professor at EAN University.
(Ecopetrol carried out a test with 5G technology at the Barranca refinery).
On the BCA scale, the ba degree (ba1, the highest, ba2, the average and ba3, the lowest), “The issuers are considered to be of speculative financial strength, either intrinsically or individually, and are subject to a considerable level of credit risk in the absence of extraordinary support from an affiliate or the government.”
In other words, they would not have state support to pay their debts in case they could not meet them.
HOW DOES IT AFFECT ECOPETROL?
According to Balaguera, the fact that Moody’s classifies Ecopetrol with “speculative financial strength” and reduce your base credit evaluation by two points (ba1 to ba3), it leads to lenders charging you more interest rates when issuing a loan due to the greater chances that you default and do not have support in case you that happens.
“By lowering the assessment grades, this makes interest rates much higher because the risk increases. Basically, it will impact Ecopetrol in its cost of capital, since credits will become more expensive and it will affect profitability in some way,” the expert pointed out.
(Ecopetrol’s formula to reduce proposed tax on crude oil).
For this decision, Moody’s relied on Ecopetrol’s extension to refinance nearly $5.1 billion in debt maturing in September 2023.
“BCA’s downgrade also considered the energy and environmental priorities of the new government, which may include changes such as restrictions on exploration and production based on hydraulic fracturing in Colombia (‘fracking’), limitations on new concessions or permits for oil exploration and new taxes on the oil and gas industry, according to the tax reform proposal”explained the qualifier.
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