The Hindu Business Line : Oil bonds being sold at heavy discounts

FACED with under-recoveries and tight cash situation, oil companies have begun selling their holdings of special bonds placed with them by the Government.

Sources said that this had driven the yield-to-maturity on these bonds close to 8 per cent. Bankers said that some of them had picked up the bonds as part of their corporate investment categories. Oil bonds are not eligible for maintaining the respective statutory liquidity ratio. The only advantage with the bonds was that they were sovereign paper and had no risk attached to them, unlike conventional corporate debt papers.

The high discounting, they said, was partly driven by the low level of liquidity attached to the oil bonds. The special oil bonds amounting to Rs 5762.85 were issued in September last year for settlement of subsidy payments to the oil companies from the Government. The bonds carried a coupon of 7 per cent and mature in 2012. The high discounts implied that many of the oil companies were, in fact, selling the bonds at prices lower than their face values. At present, six-year bonds,with SLR status, are priced at around 7.10 per cent. This implies that the oil companies are selling the securities at discounts as high as 75 basis points over sovereign papers - clearly an indication of their tight cash situation as a result of the Government's failure to hike petroleum prices in tandem with international prices.

Besides, the Government has also failed to reduce import duties to partially offset the impact of the high oil prices. Under-recoveries of the oil companies are estimated to exceed Rs 35,000 crore for the current fiscal.

If the current price trend were to continue, fears are that the under-recoveries would further mount. The weighted average import price is now in excess of $60 per barrel or close to about $450 per tonne.

The large oil marketing company, IOCL, has already reported under-realisation of Rs 8,100 crore for the first nine months of the current financial year.

Bankers said the delays in the petroleum price revisions and high borrowings by the oil companies to meet their deficits were likely to lead to a further tightening of liquidity. The discounts on the oil bonds are likely to rise in the coming months.

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