Power boards, banks fail to arrive at consensus on FRP bond pricing

Written by Aftab Ahmed | Aparna Iyer | Mumbai | Updated: Sep 17 2013, 11:04am hrs
The issuance of bonds under the Financial Restructuring Plan (FRP) for State Electricity Boards (SEB) has hit a roadblock with banks and SEBs not agreeing on the pricing of the bonds to be issued by the electricity boards in lieu of 50% of their outstanding dues to banks.

The Rajasthan SEB which is only the second after Tamil Nadu to issue bonds has not been able to complete the issuance as bankers are unwilling to accept these bonds at the coupon which is being offered, sources said.

There are certain clauses proposed by the state governments not accepted by the banks, confirmed SL Bansal, Oriental bank of Commerce CMD, when asked why there was a delay in issue of bonds from SEBs.

SEB bonds, issued under the FRP, carry a state government guarantee and are to be priced 75 basis points over the prevailing yield of the 10-year benchmark government security (G-Sec).

While the state governments want the benchmark 10-year G-Sec yield as of July 1 to be used for pricing the SEB bonds, bankers said as the bonds have not been issued, the current 10-year G-Sec yield must be considered.

On July 1, the 10-year G-Sec yield was 7.48% and the Rajasthan SEB bond would be priced at around 8.43% if this yield was taken as reference. Since July 1, the benchmark 10-year G-Sec yield has risen by over 100 basis points and is now trading close to 8.50%. This would immediately mean a 100 basis point jump in the coupon rate on these bonds, which SEBs are reluctant to offer.

The discussion is still going on which date should be considered as after July 15, yields have climbed and we feel that the bonds that are issued now should be benchmarked at current levels of yield, RK Goyal, ED, Central Bank of India, said. The issuance date for the bonds of all the SEBs that opted for the FRP was slated to be July 1. However, so far only Tamil Nadu SEB has issued bonds.

Out of the total FRP of R1.9 lakh crore, banks have agreed to restructure short-term liabilities (STLs) worth R1 lakh crore of four state electricity boards Rajasthan, Tamil Nadu, Uttar Pradesh and Haryana. These states along with Punjab and Madhya Pradesh account for 70% of the total package. Punjab, which has STLs of R12,000 crore, and Madhya Pradesh, which has STLs of R1,100 crore, have not agreed to join the restructuring programme, according to sources.

Under the FRP that was drawn up last year for ailing SEBs, banks will reschedule the repayment of 50% of the short-term loans by giving a moratorium of three years while for the balance 50% of the exposure, the SEBs will issue bonds guaranteed by the respective state government.