The Hindu Business Line : Fertiliser bonds, insurers’ pick

Bangalore, June 19 Insurance companies have shifted focus to fertiliser bonds after the introduction of the special market operations by the Reserve Bank of India (RBI) for the petroleum refinery sector. Bankers said the shift was largely due to the high yields on them.

Last year, about Rs 4,000 crore of bonds were placed with public and private sector fertiliser companies against subsidy payments by the government.

Bankers said the fertiliser companies were in the market to sell the bonds for meeting their working capital requirements. As in the case of oil companies, they have also exhausted their credit lines as banks have hit the exposure ceiling of 15 per cent.

Last month, the RBI had hiked the exposure ceiling to 25 per cent. However, in the case of the fertiliser companies, the ceiling is yet to be revised.

High discounts

With fertiliser companies strapped for cash, the discounts for fertiliser bonds are about 50 basis points over the comparative oil bonds and at least 70 basis points over sovereign bonds. For instance, on the 8.30 per cent 2023 fertiliser bonds, the bids are at about 9.2 per cent. The 8.01 per cent 2023 oil bond was picked up by the RBI through its special market operations at 8.65 per cent. The yield on the sovereign issue of 6.30 per cent 2023 is 8.50 per cent. The yield differential was despite the sovereign guarantee cover for fertiliser bond issues.

Illiquid papers

A top public sector bank official said, “Fertiliser bonds are illiquid instruments. With liquidity drying up, nobody wants these instruments in their books.” Fertiliser bonds, moreover like other special bond issues, are also not eligible securities for maintaining the Statutory Liquidity Ratio.

As a result, most fertiliser companies were entirely dependent on institutions like the Life Insurance Corporation (LIC) and other long term financiers that have appetite for long term securities for discounting the bonds. LIC’s discounting rates currently ranged between 9 and 9.5 per cent, in view of the high yield expectations.

Besides, LIC was a monopoly buyer, leaving fertiliser companies with little choice other than discounting the bonds at high rates.

More Stories on : Debt Market | Govt Bonds | Fertilisers

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