Bloomberg News

Weakest Rupee Sends Refiners to Dollar Borrowings: India Credit

October 14, 2011

Oct. 14 (Bloomberg) -- The combination of a weakening rupee and U.S. interest rates near a record low is prompting India’s state-owned refiners to turn to dollar funding for oil imports.

Bharat Petroleum Corp. and Hindustan Petroleum Corp. are in the process of raising $865 million in loans, according to people familiar with the transactions. That would increase overseas debt taken on by state-run refineries this year to $1.57 billion, the most since Bloomberg started compiling the data in 2004.

The benchmark cost of borrowing in dollars between banks for three months has dropped to 0.4 percent from a five-year average of 2.1 percent, below the 9.38 percent rate for rupee borrowing. The currency’s 9 percent slide against the dollar this year, the biggest drop among Asian currencies, wiped out the benefits of an 8 percent retreat in crude oil prices for the world’s fourth-largest energy consumer.

“The rupee’s decline is hurting the refiners and is one of their biggest headaches right now,” Atul Gharde, a Hong Kong- based credit analyst at SJS Markets Ltd., said in an interview on Oct. 12. “Dollar borrowings are cheaper and allow refiners to pay for crude in that currency, hedging the currency risk.”

Earnings were already being eroded because the companies are required to sell fuels below cost under a government plan to keep consumer prices low. Refineries are losing 2.7 billion rupees ($55 million) a day from selling diesel, kerosene and cooking gas at a discount, oil ministry data show. Such losses at Bharat Petroleum are estimated at 280 billion rupees in the year ending March 2012, according to Finance Director S. Varadarajan.

Foreign-Exchange Loss

Every one-rupee decline in the Indian currency against the dollar increases annual revenue losses for the three government- owned refiners by 80 billion rupees, Oil Minister S. Jaipal Reddy said in a statement on Oct. 10. The rupee was little changed at 49.12 per dollar today. Implied volatility on one- month dollar rupee options, a gauge of expected swings in the exchange rate, has risen to 9.7 percent from 5.7 percent three months ago, according to data compiled by Bloomberg.

The value of India’s oil imports averaged $10.6 billion during the first eight months of this year, 28 percent more than a year earlier, as the local currency fell, government data show.

Oil companies are favoring dollar debt after the Reserve Bank of India raised its benchmark repurchase rate by 3.5 percentage points since March 2010 to a three-year high of 8.25 percent, in the nation’s fastest monetary tightening on record. The yield on Hindustan Petroleum’s 7.7 percent rupee notes due in April 2013 has surged 192 basis points, or 1.92 percentage point, since they were issued in April 2010 to 9.62 percent, Bloomberg data show.

Rupee Debt Cost

“Dollar borrowings bailed us out this time as rupee debt costs remain high,” Bharat Petroleum’s director Varadarajan said in an interview on Oct. 11. “Our revenue losses from fuel sales this year are expected to be significant and we are increasing overseas funding to lessen that problem.”

Interest costs at the Mumbai-based company rose to 3.35 billion rupees in the three months ended June 30, the most since 2009, according to data compiled by Bloomberg. Such expenses climbed to 2.64 billion rupees, the most since the first three months of 2010, at Hindustan Petroleum and to 10.4 billion rupees, the highest level in seven quarters, at Indian Oil Corp., the nation’s biggest petroleum processor.

Overseas Borrowings

Indian Oil raised $500 million in July selling 5.625 percent U.S. currency-denominated bonds maturing in 2021. The yield gap between the company’s 7.4 percent rupee debt and the 4.75 percent dollar securities, both due in 2015, increased 121 basis points this year to 600, according to data compiled by Bloomberg. The company plans to raise a limit on its total debt by 38 percent to 1.1 trillion rupees as losses from fuel sales mount, the Business Standard reported Sept. 23.

Lenders including Bank of Tokyo-Mitsubishi UFJ Ltd., State Bank of India and Sumitomo Mitsui Banking Corp. raised $465 million in five-year loans for Hindustan Petroleum, according to a person familiar with the transaction, who asked not to be identified as details are private. Bharat Petroleum plans to borrow about $400 million, according to a person with direct knowledge of the matter, who asked not to be identified because the details are private.

Indian companies including ICICI Bank Ltd. and NTPC Ltd. raised a combined $27.3 billion this year from overseas loans and bond sales, up 17 percent from a year earlier, data compiled by Bloomberg show. Rupee debt issuance has declined to 1.23 trillion rupees from 1.68 trillion rupees a year earlier.

Widening Rate Gap

Yields on AAA-rated five-year rupee corporate bonds are currently at 9.74 percent, 302 basis points more than average dollar yields for Indian companies, according to data compiled by Bloomberg and HSBC Holdings Plc. The rate on similar-dated company debt is 1.68 percent in the U.S., 5.87 percent in China and 7.28 percent in Korea. The difference in yields between rupee government debt due in a decade and similar-dated U.S. Treasuries widened 194 basis points this year to 655.

Yields on 10-year Indian government bonds have climbed 86 basis points this year, the most after Vietnam among Asia’s local-currency debt markets, data compiled by Bloomberg show. The yield on benchmark 7.8 percent notes due in April 2021 jumped 20 basis points this week to 8.78 percent, according to the central bank’s trading system. India’s sovereign notes returned 2.7 percent this year, while Indonesian debt gained 17.6 percent in the region’s best performance, according to an index compiled by HSBC.

Dollar funding costs are rising for emerging-market companies as Europe’s debt crisis prompts investors to avoid assets perceived to be riskier. The average yield on U.S. currency-denominated securities issued from India surged 156 basis points this year, heading for the biggest increase since 2008, to 6.72 percent, HSBC data show.

‘Makes Things Difficult’

“The cost of borrowing in dollars has also been rising and that makes things a little difficult for the refiners,” K. Ravichandran, co-head of corporate ratings at ICRA Ltd., the local affiliate of Moody’s Investors Service, said in an interview yesterday.

The average cost for credit-default swaps insuring against a default on the debt of seven Indian issuers has climbed 229 basis points this year to 428, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.

The shares of Bharat Petroleum and Hindustan Petroleum have slid 9 percent and 30 percent in the past year as their debt burden and currency risk increased. Indian Oil dropped 25 percent.

“The three refiners are in a very bad situation and the rupee is increasing their pain,” Rina Sanghavi, a Kolkata-based research analyst at SPA Securities Ltd., said in an interview yesterday. “Their profit would continue to be under pressure. They’re being forced to borrow more for their working capital needs and this will increase their interest payments.”

--Editors: Anil Varma, Sam Nagarajan

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editors responsible for this story: Amit Prakash at aprakash1@bloomberg.net; Sandy Hendry at shendry@bloomberg.net


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