The Hindu Business Line : Govt likely to issue Rs 35,000 cr of oil bonds

The sale of the bonds stemmed from oil companies’ escalated funding requirements with the rise in global oil prices. Currently, global oil prices are at about $124 a barrel. This translates into an import basket price of about $120 a barrel.

Bankers said that the increased prices have fuelled the demand for foreign exchange. At the current prices, the foreign exchange requirement is estimated at about $265 million per day. Indian imports are estimated at 2.2 million barrels per day. As a result, the rupee-dollar exchange rates dipped to Rs 42.40 or about 6.5 per cent since the beginning of this financial year. This was despite the current account driven inflows. The exchange rate depreciation, bankers said, further increased the pressure on refineries. This was because the cost of purchasing foreign currency increased along with the hardening oil prices.

Refineries, to meet the funding requirements, have been selling their holdings of oil bonds issued by the Government. The Government had placed about Rs 20,000 crore of bonds with the refining companies between April and December of 2007. Another Rs 35,000 crore of bonds are expected to be placed with the refineries for covering under recoveries for FY 2007-08, estimated at a little over Rs 77,000 crore.

The sale of oil bonds have resulted in widening of spreads. Spreads between sovereign borrowings and oil bonds are about 100 basis points. For instance, the 8.01 per cent 2023 oil bond sold at a yield to maturity (YTM) of 8.95 per cent on Wednesday. The sovereign security for the 6.17 per cent for the same maturity was quoted at a YTM of 7.94 per cent. Spreads between sovereigns and state development loans were just 55 basis points. Bankers said that one major reason for the anomaly in spreads was the SDLs status as eligible securities for statutory liquidity ratio.

Yet to get appproval

Besides, bankers said some of the oil bonds are yet to receive approval from the Insurance Regulatory and Development and Authority for investments by life insurance companies. But even among the insurance companies, only the Life insurance Corporation was picking up oil bonds, though on its own terms. In fact, in the last tranche of the oil bonds sold by the Indian Oil Corporation of India, LIC picked up securities at a weighted average YTM of 9.22 per cent. Hindustan Petroleum Corporation’s issue last week was able to realise only Rs 129 crore, substantially short of the targeted amount of Rs 662 crore.

But bankers said that oil companies are now willing to place the bonds even at high YTMs, implying losses. This was because, accessing their credit lines would cost at least 10.5 per cent, they added.

Exposure ceiling

Moreover, bankers said, that the RBI was yet to give approval for enhancement of the exposure ceiling to some banks that had approached it. Many banks have hit the exposure ceiling of 20 per cent of their respective capital to oil companies.

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