Bloomberg News

Iran Risk Sends Refiner Yields to One-Year High: India Credit

January 12, 2012

Jan. 12 (Bloomberg) -- Borrowing costs for India’s biggest refiners are surging to the highest level in at least a year as the prospect of tighter sanctions against Iran threatens supplies to the world’s fourth-largest oil consumer.

Yields on the 4.75 percent dollar-denominated debt of Indian Oil Corp., the nation’s largest refiner, rose 19 basis points in the past month to 4.28 percent, according to data compiled by Bloomberg. Yields on the 2016 dollar convertible bonds of Indian refiner and power plant operator Essar Energy Plc jumped 232 basis points to 19.74 percent. At the same time, yields on London-based BP Plc’s 2019 notes dropped 35 basis points to 2.72 percent.

Disruption to shipments from Iran, India’s second-biggest oil supplier, may deepen losses for oil companies that are required by the government to sell fuels below cost. Costlier energy imports would also stymie central bank efforts to rein in inflation of more than 9 percent and worsen an economic slump that fueled a 16 percent tumble in the rupee in 2011.

“The oil companies will have to bear higher costs if they have to buy oil from elsewhere,” Raj Kothari, a bond trader in London at Sun Global Investments Ltd., said in an interview on Jan. 10. “The bonds that are related to this issue, like those of Indian Oil, are definitely going to get affected negatively.”

U.S. Law

U.S. President Barack Obama signed into law on Dec. 31 measures that block foreign lenders that conduct business with the central bank of Iran from accessing the U.S. financial system. The European Union will also consider restrictions on Iran, including a ban on crude imports, in response to the country’s nuclear program when the bloc’s foreign ministers meet on Jan. 23.

Indian Oil and Essar Energy may struggle to find banks willing to handle payments to Iran because of sanctions against the Gulf state’s lenders. Mangalore Refinery & Petrochemicals Ltd., a unit of India’s largest energy explorer, is the biggest local buyer of Iranian crude.

Turkiye Halk Bankasi AS, which has been routing India’s payments for Iranian crude, told the refiners it may no longer be able to do so, four people with knowledge of the matter said this week, asking not to be identified because the information is confidential.

“This is a serious issue,” Praveen Kumar, an oil and gas analyst at Facts Global Energy in Singapore, said in an interview on Jan. 10. “India doesn’t seem to have a plan B at the moment. The refiners will be worried about what they are going to do.”

Exploring Options

India, which got 11 percent of its crude imports from Iran last year, is exploring the option of making payments to the Gulf state through Russia’s OAO Gazprombank, though no deal has been reached, according to three of the people.

“Essar is not being impacted by the Iranian situation,” the company, which operates the nation’s second-largest private refinery at Vadinar in western India, said in an e-mail on Jan. 9. “At our Vadinar refinery, we continue to be able to source the crude we require from Iran, while our Stanlow refinery does not process Iranian crude.”

Two calls made yesterday to Ajit Pathak, a New Delhi-based spokesman for Indian Oil, weren’t answered.

Rising Oil

The risk of supply disruptions threatens to further boost energy costs and fuel inflation in Asia’s third-largest economy, which imports almost 80 percent of the oil it uses. The value of India’s oil imports averaged above $11 billion during the first 11 months of 2011, 34 percent more than a year earlier, as international crude prices gained and the rupee fell, government data show. The Reserve Bank of India raised interest rates by a record 3.75 percentage points in the last two years to moderate wholesale-price gains that averaged 9.6 percent in 2011.

Crude oil in New York climbed 8 percent in 2011, completing a third annual advance, and touched an eight-month high of $103.74 per barrel on Jan. 4, according to data compiled by Bloomberg. India’s rupee lost 16 percent last year in the worst performance among Asian currencies and touched a record low of 54.305 per dollar on Dec. 15. It rose 0.1 percent to 51.8575 today.

“India is much more vulnerable to the price of oil than similar developing economies,” Taina Erajuuri, a money manager in Helsinki at FIM Asset Management Ltd., overseeing about 1 billion euros ($1.3 billion) of emerging-market assets, said in an interview on Jan. 10. “I worry that soon India will have to import 90 percent of its oil needs and it will always be an inflation threat. You can’t get rid of that kind of inflation by raising interest rates.”

Record Losses

A sliding rupee and higher borrowing costs worsened losses at state-controlled oil companies, which are required to sell fuels at a discount under a government plan to cap consumer prices. The firms may lose as much as 1.3 trillion rupees ($25 billion) from such sales in the financial year ending March 31, Oil Secretary G.C. Chaturvedi said on Nov. 22. Every one-rupee drop in the currency against the dollar boosts annual revenue losses for government-owned refiners by 80 billion rupees, Oil Minister S. Jaipal Reddy said on Oct. 10.

Indian Oil, Hindustan Petroleum Corp. and Bharat Petroleum Corp., the three biggest state refiners, reported a combined loss of 141 billion rupees for the three months ended Sept. 30, the most on record, data compiled by Bloomberg show. Total interest expenses at the companies climbed to an all-time high of 22.4 billion rupees last quarter. Combined net debt, or liabilities minus cash, jumped 34 percent in the first half of the financial year to 1.27 trillion rupees.

Dollar Bonds

Oil companies in India are favoring dollar-denominated debt to shield earnings from the rupee’s decline and the surge in local interest rates. They raised at least $1.17 billion last year from overseas loans and bond sales, according to data compiled by Bloomberg. Indian Oil plans to market a $250 million five-year loan next month, a person with direct knowledge of the matter said this week, asking not to be identified as details of the transaction are private.

Benchmark five-year bond yields for AAA rated borrowers in India rose 34 basis points, or 0.34 percentage point, in the past 12 months to 9.43 percent, data compiled by Bloomberg show. Yields on 7.7 percent rupee-denominated debt due April 2013 of Hindustan Petroleum jumped 67 basis points to 9.47 percent, according to prices from the Fixed Income Money Market and Derivatives Association of India.

Default Swaps

Ten-year sovereign yields added four basis points in the same period to 8.22 percent. They fell 2 basis points today, according to the central bank’s trading system. The extra yield demanded by investors to hold the notes over similar-dated U.S. Treasuries widened 153 basis points to 635. India’s sovereign notes earned 7.7 percent in the past 12 months, while Indonesian securities returned 24.6 percent in the biggest gain among 10 Asian fixed-income markets tracked by HSBC Holdings Plc.

The cost to protect the debt of State Bank of India, a proxy for the nation, against non-payment for five years using credit-default swaps jumped 213 basis points in the past year to 392 basis points, according to 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 company fail to adhere to its debt agreements.

‘Adds to Costs’

Indian refiners’ debts to Iran for purchases rose to as much as $5 billion in July, said Central Bank Governor Mahmoud Bahmani, according to the Islamic Republic News Agency. The outstanding payments threatened to jeopardize about $9.5 billion in annual trade between the nations, with Iran telling customers that they wouldn’t receive August shipments unless the bills were paid, according to the Fars news agency. The refiners started clearing the outstanding payments in August after Turkey’s Halk Bank agreed to make transfers.

“Refineries are calibrated to process particular kinds of oil,” Hemant Dharnidharka, head of credit research in Hong Kong at SJS Markets Ltd., said in an interview on Jan. 10. “Even if the companies were to get replacements from elsewhere, the price may be higher and they may need to recalibrate their plants, all of which adds to their costs.”

--With assistance from Anto Antony in New Delhi. Editors: Anil Varma, Sandy Hendry

To contact the reporter on this story: Pratish Narayanan in Mumbai at

To contact the editors responsible for this story: Sandy Hendry at; Alexander Kwiatkowski at

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