The Hindu Business Line : Oil cos strapped for cash

Many refiners had sold part of their holdings of oil bonds to banks, between May and June, at steep discounts to face value to raise funds for meeting import payment dues.

C. Shivkumar

Bangalore, Sept. 15 With the delay in allocation of subsidy bonds this year, oil companies are once again strapped for cash.

Top bankers said that refineries are now back in the credit markets. They said PSU refiners were prepared to offer rates as high as 12 per cent for short-term borrowings of up to a year. Refiners tapped bank credit after running out of their oil bond stocks.

This year, few oil bond issues were made by the Government despite mounting subsidy overdues. The last oil bond issue was made in March for Rs 9,296 crore. The outstanding oil bonds are about Rs 62,686 crore. Many refiners had sold part of their holdings of oil bonds to banks between May and June at steep discounts to face value to raise funds for meeting import payment dues. In addition, refiners also placed at least Rs 22,000 crore of bonds with the Reserve Bank of India under the special market operations (SMO). The SMOs allowed refineries direct access to foreign exchange from the RBI, by passing the foreign exchange markets through sale of oil bonds.

Bankers said that in the absence of bond placements against subsidy overdues refiners had little option but to raise funds through borrowings for meeting their crude oil purchase requirements. Refiners, bankers said, were taking advantage of the enhanced exposure limits notified in May this year. The RBI had then raised banks prudential exposure limits to 25 per cent of their respective capital funds for lending to refiners. In addition, the RBI had also permitted another five per cent enhancement of the exposure limits. The enhanced limits allowed banks’ funding to go up to 30 per cent of capital funds for meeting the credit requirements of oil refiners.

Higher costs

Bankers, however, said that although oil refiners were given priority for allocation of credit, the costs were not cheap. Costs were benchmarked closer to current prime lending rate of 12.75 and 13 per cent. This was in view of banks’ own rising costs of resources.

Faced with the high bank funding costs, refiners such as the Indian Oil Corporation (IOC) had opted for tapping the bond markets. Early this month, IOC had privately placed 3 year and 10-year bonds for Rs 1,500 crore with financial institutions, including the Life Insurance Corporation, general insurers, mutual funds and banks at coupons that ranged between 11 and 11.15 per cent. The remaining three refiners are also shortly expected to tap the bond markets, bankers said.

However, bankers said the costs for bond placements for the remaining refiners are likely to rise closer to the lending rates of banks. This was in view of tight liquidity situation in the markets triggered by a panic pullout by foreign institutional investors. Besides, FIIs like Lehman Brothers that had picked up oil companies’ bonds and commercial papers, were selling them at hefty discounts to the face value. FIIs were selling the oil bonds and commercial papers with residual maturities of less than a year at yields close to 12 per cent.