Govt takes $ risk for PSU overseas bonds

Written by Himani Kaushik | New Delhi | Updated: Aug 14 2013, 10:43am hrs
The government is looking at giving the firms being asked to raise capital from abroad via quasi-sovereign bonds an extra cushion of comfort by providing immunity to currency risk involved in the exercise. Additionally, sources said, the government would also seek to improve sentiments in currency market by asking oil marketing companies (OMCs) to cap their dollar payments for crude imports to $350 million a day. Based on Q1FY14 import data, OMCs spent a daily average of $466 million onpetroleum imports.

On Monday, the government had announced a host of steps to attract additional dollar inflows of $11 billion in FY14.

Absence of exchange rate risk and an explicit government guarantee for quasi-sovereign bond issuers are meant to ensure that the projected inflows indeed materialise and help finance the current account deficit, conservatively estimated at $70 billion for FY14. Mondays measures included asking three state-owned financial institutions IIFCL, IRFC and PFC to raise a total of $4 billion in the current fiscal through bonds. Analysts said the government guarantee will give these firms a pricing advantage of at least 100 bps over overseas bonds not backed by such guarantee.

Sources said apart from these institutions, several PSUs would also be urged to raise money abroad via bonds. These may include ONGC, NTPC, NHPC, GAIL and SAIL, apart from the three OMCs IOC, HPCL and BPCL.

This means the OMCs which have already been asked to raise external commercial borrowings worth $4 billion for working capital requirements will have both routes ECB and bonds to raise money abroad.

Analysts feel it would not be easy for the three OMCs to raise $4 billion through loans, although the new window for raising working capital funds might help. The ECB route for working capital has been opened subject to the trade credits and ECBs for OMCs remaining within the overall limit.

The government reckons OMCs and other PSUs might find tapping the bond route easier than raising funds through ECBs.

A senior official said a meeting next week would finalise names of state-run companies which can raise money overseas through dollar-denominated bonds.

Samir Kanabar, infrastructure expert at Ernst & Young said: if these quasi-sovereign bonds are raised and settled in dollars, lenders will be completely risk-free as anyway, these are government-owned companies supported by sovereign guarantee. So, many foreign lenders may be interested in investing in such bonds. Kanabar said the funds will be invested in approved infrastructure projects, which would prompt more PSUs to raise such bonds. The government, he said, was likely to pass on the currency risk to the end consumers (infrastructure projects financed by the state-owned financial institutions). What would facilitate this is that loans and bonds raised abroad would be cheaper than domestic loans.

IOC director-finance PK Goyal said previously, the company could raise working capital loans from abroad with a tenure one year, which is now increased to three. IOC will raise $500 million through a syndicated loan by the end of August, which will now be used for working capital needs. Goyal said as per the new rules, they can raise about $750 million for capital expenditure and $1 billion for working capital requirements. The interest rates vary widely depending on tenure and size. In July, it had raised 10-year dollar denominated bonds of $500 million paying 3.224 percentage points over US Treasuries.

Apart from IOC, ONGC Videsh and BPCL too have raised money abroad in recent past to finance their capex plans.