SAIL defers 5 year bond issue over bid rates

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Mumbai | Updated: October 29, 2015 2:11:54 AM

STEEL Authority of India (SAIL) is understood to have deferred its five-year bond issue because the company is not comfortable with the rate at which bids are coming in.

STEEL Authority of India (SAIL) is understood to have deferred its five-year bond issue because the company is not comfortable with the rate at which bids are coming in. The lowest bid so far has been 8 basis points higher than the steelmaker’s expectations, according to bond arrangers.

Ajay Manglunia, executive vice-president at Edelweiss Securities, confirms that SAIL deferred its five-year bond issue two days back since the lowest yield offered to the company stood at 8.18% while SAIL was looking to issue bonds at a better pricing.

“The company had made a counter-offer at 8.10%. Even at 8.18%, SAIL received bid for a small quantum against the R500 crore it was planning to raise. This is why it deferred the bond issue,” said Manglunia.

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Corporate bond yields in October are at comparatively softer levels from what were seen in September. Bloomberg data show that on September 22, Rural Electrification Corporation (REC) issued five-year bonds at 8.36%. A few days later, in a surprise move on September 29, the RBI cut the repo rate by 50 bps that pushed yields on corporate bonds down.

It became evident when REC was able to issue 10-year bonds at a yield as low as 8.11% on October 7.

The yield on a five-year public sector unit paper currently stands close to 8.15%. However, SAIL was offered a bid of 8.18% because of the present conditions in the steel sector, market participants said.

“SAIL is always seen demanding a better price for its bond issue compared to prevalent market rates. The yield on a five-year PSU paper stands at 8.15% as of now. For SAIL, the yield offered was 8.18% with the premium of a few basis points taking into account the sluggishness prevailing in the steel sector,” Manglunia added.

Amid a crash in global commodity prices, metal producers, especially domestic steel makers, are facing a very difficult business environment. At a time when global benchmarks are trading at multi-year lows, slowdown in domestic demand and onslaught of imports have led to every second large-to-medium size steel producer reporting losses in the first quarter of this fiscal.

The stress on the sector is evident with the number of rating downgrades that have taken place in FY16 so far. Of the 11 metals producers that saw rating downgrades, seven are steel producers of which four are now graded “D”. Among the bigger players, Vedanta, Hindalco and Jindal Steel and Power have also seen a demotion in their credit ratings.

Analysts expect many companies from the sector to report negative cash flow for FY16 even as an imposition of a safeguard duty is likely to bring some respite in terms of higher domestic prices.

The future does not look great either. On Wednesday, Bloomberg quoted the deputy head of the China Iron and Steel Association, Zhu Jimin, saying that production cuts are slower than the contraction in demand and, therefore, oversupply is worsening.

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