The Hindu Business Line : Oil firms seek higher coupons on bonds

Caught in a fix
Cos raise funds at higher rates to meet payment obligations.
Oil bonds are treated as illiquid securities by banks and primary dealers.
Banks heavy on investments, not keen on long-dated papers

C. Shivkumar

Bangalore, April 2 Petroleum companies have sought higher coupons on oil bonds to offset the impact of illiquidity and slimming refinery margins.

One major factor that has driven oil companies to seek higher coupon rates is the high discounting rates applied by banks and financial institutions on funds. Oil companies are “+AAA+” borrowers. Triple A rated borrowing currently raise funds at close to about 10 per cent, as and when they draw on their credit lines.

Some refiners have also used the collateralised borrowing and lending obligations (CBLO) market, where the rates are close to about 9 per cent The CBLO, essentially a money market instrument, is used for raising funds with oil bonds as collateral. This mechanism allowed raising funds for up to one year maturity, according to the Reserve Bank of India guidelines.

Rate spread

Besides, refineries have also resorted to selling oil bonds, mostly to Life Insurance Companies through outright deals. The selling has pushed up spreads to over 75 basis points between oil bonds and comparative sovereigns. This was despite oil bonds’ status as sovereign guaranteed securities. For instance the 6.17 per cent government security, maturing in 2023, is currently quoted at a yield to maturity (YTM) of 8.04 per cent. The 8.01 per cent Oil Bond maturing in the same year is quoted at a YTM of 8.9 per cent.

Effectively it implied that oil companies received a coupon flow of just 8.01 per cent per annum, but ended up paying a far higher rate for raising funds for meeting payment obligations, further squeezing their margins.

High premium

The high premium on the oil bonds was largely on account of illiquidity. Oil bonds are treated as illiquid securities by banks and primary dealers. The high illiquidity premium was in view of the bloated investment books of banks. Banks currently have outstanding investments equivalent to about Rs 9.7 lakh crore, translating into an incremental investment deposit ratio of 43 per cent, as against the prescribed Statutory Liquidity Ratio (SLR) of 25 per cent.

Consequently there was little requirement for investments, leading to high illiquidity premia. Besides, bankers said, most oil bonds were long-dated, and hence barring life insurance companies, few banks were interested in the securities other than for CBLO-based transactions.

Bankers said, “There is little we can do (about the high premium). It is a government decision to make the bonds eligible for SLR or raise the coupon rate, to offset the increased costs.”

Rising prices

Payment obligations of the refineries have been mounting over the last few months. Global oil prices are currently about $107 a barrel or about $790 a tonne. The increased global prices have resulted in slimming of the refinery margins for the refineries, since the import costs have not fully passed on to pricing of domestic products, resulting in under-recoveries. Outstanding oil bonds currently amount to about Rs 62,000 crore. For the last financial year, about Rs 11,257 crore have been floated, according to the revised budget estimates. This year, more oil bonds are expected to be placed with the companies to offset the subsidy impact.

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