Oil bonds to offer OMCs less value as yields move up

Even though the government has shifted from bonds to cash in compensating the losses of oil marketers, the oil companies will have to forego around Rs 6,000 crore if they liquidate the bonds now as yields have moved up sharply.

The OMCs are sitting on oil bonds worth Rs 30,000 crore. These were issued at a coupon rate of 6.9 per cent. The ten-year bonds now yield a rate of over 8.4 per cent compared to 7.86 per cent in April. Whenever the marketers decide to sell it, they will have to do it at around 20 per cent discount, meaning a loss of around Rs 6,000 crore, said a senior executive in one of the government-controlled oil marketing companies.

The OMCs have no immediate plan to sell these bonds, but they may have to soon consider it, considering that their borrowings are significantly high. Their combined borrowing is well over Rs 110,000 crore. With delay in government compensation for current fiscal and continued loss on diesel, kerosene and LPG, the marketers continue to borrow more.

In 2008-09, high discounts led to OMCs suffering losses of around Rs 1,700 crore on the sale of bonds. The average discount on the face value of bonds during that year was as high as four per cent compared to only two per cent in the preceding 2007-08. S K Joshi, who recently retired as director (finance) from Bharat Petroleum, said RBI’s consistent increase in rates has pushed up the yield expectations. “With higher interest rates, more discounts will have to be offered at the time of sale to make oil bonds as attractive as other high-yield bonds,” he said.

The top oil marketers — Indian Oil, BPCL and HPCL— who purchase crude oil at market price and sell diesel, kerosene and domestic LPG at government-regulated prices, used to be compensated through bonds.

The mechanism for oil bonds was devised in 2005-06. Bonds being in the nature of deferred payment, help the government keep the bloating oil subsidy bill off its budget. For compensating the losses of OMCs from 2009-10, the government shifted from a system of bonds to cash. The transition from bonds to cash impacted the government’s fiscal deficit, but helped the oil marketers as it improved their liquidity.

True that it has been over two years that the government has shifted to cash compensation, but oil marketers are carrying bonds. IndianOil is stuck with oil bonds worth Rs 15,000 crore, while BPCL and HPCL carry bonds worth around Rs 7,500-8,000 crore each.