IOC keeps off overseas debts, to raise funds from domestic market

Written by Anupama Airy | Sunny Verma | New Delhi | Updated: Dec 3 2008, 05:52am hrs
Despite the recent relaxation by the government for refining firms raising overseas debt, the countrys largest state-owned oil refining and marketing company, Indian Oil Corporation (IOC), has decided to shift its focus to sourcing of rupee funds from the domestic market. With overseas funds not forthcoming amidst frozen credit markets globally, the board of IOC has trebled the limit of its bond issue to Rs 15,000 crore to enable it raise funds domestically.

This also means that rupee liquidity will continue to remain under pressure as companies turn to domestic banks and institutions to meet their fund requirements. RBI had said the pressure on domestic funds would be higher as overseas funds choke.

A senior IOC official said the limit has been increased to cater to the companys high capex and working capital requirement amid reduced internal accruals. The long tenor bonds would be issued to mutual funds, insurance companies, provident funds and other institutions as and when required. The capital expenditure of the company for the current year is Rs 10,000 crore and given the huge working capital requirement for crude oil imports, the borrowings of the company has already touched Rs 66,000 crore as against Rs 19,000 crore at the end of March 2008.

Moreover, the internal accruals of the company are negative at this point of time. Asked to comment on the rating of the company, IOC director (finance) SV Narasimhan said, The rating is stable. The Rs 1500-crore bond issue by IOC in September had an investment grade rating. For the short term, it is AA+. The bond issue ceiling has been raised considering high fund requirement, non-availability of overseas loans and market appetite for Indian Oils bonds, a company source said.

While the under-recoveries of oil marketing companies have fallen as oil touched a low of $52 a barrel on Monday, the raised limit on bond issue will give IOC the flexibility to raise funds in these times of tight liquidity. This would also be helpful at a time when global crude oil prices are swinging rapidly. IOCs investment grade rating would mean the pricing of the bond issue would competitive, even though spreads on corporate bonds have widened recently as the credit crunch the economy. In September 2008, IOC issued 3-year bonds worth Rs 430 crore at 11.15% and 10-year bonds worth Rs 1,070 crore at 11%, much lower than the rates many other companies had to pay in the same month to raise funds.

Though the government last month allowed refining companies to bring up to $500 million of ECBs into India, from the earlier $50 million, overseas funds are unlikely to come by due to global financial crisis. Moreover, lenders overseas are now asking for spreads of as high as 600-700 basis points above the London Inter Bank Offered Rate, bankers say. This means, including the forex hedging, swap and other transaction charges, the cost of overseas funds come closer to the domestic debt. This, too, has reduced the attractiveness of overseas debt for Indian companies. Indeed, the India Inc raised only $1.12 billion of ECBs in October, much lower than $2.8 billion in September.