Rupee Drop Sends Hindustan Petroleum Yield to One-Year High: India Credit
Rupee Drop Sends Refiner Yields to One-Year High
Prashanth Vishwanathan/Bloomberg
A man walks past petrol tankers, outside an oil depot in New Delhi. Indian refiners cut gasoline prices for the first time in three years on Nov. 16 as inflation sparked protests. The act widen their losses.
A man walks past petrol tankers, outside an oil depot in New Delhi. Indian refiners cut gasoline prices for the first time in three years on Nov. 16 as inflation sparked protests. The act widen their losses. Photographer: Prashanth Vishwanathan/Bloomberg
Nov. 23 (Bloomberg) -- Patrick Perret-Green, Singapore-based head of foreign-exchange and rates at Citigroup Inc., talks about the Indian rupee. The currency fell to a record, prompting the central bank to say it’s weighing action to stem the worst performance in Asia this year. Perret-Green also discusses the outlook for the yen. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
Borrowing costs for India’s biggest state refiners have surged to the most in more than a year as the rupee’s plunge to a record low and a cut in local gasoline prices widen their losses.
The yield on Hindustan Petroleum Corp.’s rupee bonds due 2013 rose 29 basis points this month to 9.63 percent, according the Fixed Income Money Market and Derivatives Association of India. That on Indian Oil Corp.’s 2015 dollar debt jumped 57 basis points to 4.38 percent. The rate on the 2017 debt of China Petroleum & Chemical Corp. fell 49 basis points to 3.42 percent.
Indian refiners cut gasoline prices for the first time in three years on Nov. 16 as inflation sparked protests in a country where more than 75 percent of people live on less than $2 a day. The rupee’s 14.3 percent tumble this year, the biggest in the region, and oil’s 13 percent gain in London have raised import costs for the world’s fourth-largest oil consumer.
“India’s refiners are in a negative spiral,” Atul Gharde, a Hong Kong-based credit analyst at SJS Markets Ltd., said in an interview on Nov. 22. “They have to pay for oil with the rupee, which is essentially in a free fall. They also can’t raise prices because that will stoke inflation.”
Losses deepened last quarter at Hindustan Petroleum, Indian Oil and Bharat Petroleum Corp. (BPCL), prompting the oil ministry to seek 140 billion rupees ($2.7 billion) from the finance ministry as compensation for the companies for selling fuels at a discount in that period. State-owned oil companies may lose as much as 1.3 trillion rupees from such sales in the financial year ending March 31, Oil Secretary G.C. Chaturvedi said on Nov. 22. Mumbai-based Indian Oil, the nation’s biggest refiner, lost a record 74.9 billion rupees in the three months ended Sept. 30.
‘Fragile’ Condition
“The financial condition of the companies is fairly fragile and I’m worried about their health,” Oil Minister S. Jaipal Reddy said Oct. 19. “We’re pressing the finance ministry for substantial compensation.”
The government forces the companies to sell fuels including diesel, kerosene and cooking gas at discounts to protect the poor from inflation that accelerated to 9.73 percent in October, the fastest pace among the Group of 20 nations.
The yield on Indian Oil’s 4.75 percent dollar bond due January 2015 surged 73 basis points, or 0.73 percentage point, after refiners reduced gasoline prices by 2.22 a liter in New Delhi on Nov. 16, less than two weeks after the last increase. It jumped 44 basis points the day of the price increase and added a further 30 basis points on Nov. 23, a day after the rupee fell to an all-time low of 52.73 per dollar. The bond’s price is currently at 101.056 per $100 face amount, according to prices from BNP Paribas SA.
Spreads Widen
The extra yield on Hindustan Petroleum’s 7.7 percent rupee- denominated debt due April 2013 increased 27 basis points in November to 99 as the rupee slid 6.4 percent, heading for the worst month since the collapse of Lehman Brothers Holdings Inc. in September 2008. Spreads on the similar-dated 4.75 percent dollar notes of Valero Energy Corp., the largest independent U.S. oil refiner, climbed one basis point to 118.
“The problems for refiners crop up as there is a lag between their bill payments and the subsidy payouts from the government,” Sailesh K. Jha, Singapore-based head of Asia markets strategy at Skandinaviska Enskilda Banken AB said in an interview on Nov. 22. “The rupee’s depreciation is likely to persist and it is not clear that we are going to see stabilization in the near term. Together with the overall view on inflation, the yields will go up.”
Rupee Trouble
Every one-rupee drop in the Indian currency against the dollar increases annual revenue losses for the three government- owned refiners by 80 billion rupees, the oil ministry said Nov. 4. The rupee declined 0.1 percent today to 52.1275 per dollar. The value of India’s oil imports averaged $10.5 billion during the first nine months of this year, 27 percent more than a year earlier, as the local currency fell, government data show.
“Because the rupee is weak, refiners have to borrow more to get the same oil,” said Gharde at SJS Markets. “Also, they have to bear the burden of subsidies. Somebody who is actively trading may not want to enter Indian-refiner bonds right now.”
Implied volatility on one-month dollar rupee options, a gauge of expected exchange-rate swings, rose 275 basis points this month to 13.25 percent, data compiled by Bloomberg show.
The debt of refiners including Indian Oil may still find buyers who are encouraged by the government’s support to the companies, according to Sun Global Investments Ltd.
Government Support
“Indian Oil is a government company and so in terms of credit risk, people who are looking at emerging markets and India may feel more comfortable with it,” Raj Kothari, a London-based bond trader at Sun Global, said in an interview on Nov. 22. “If it starts trading below 100, I’ll definitely go for it.”
The combination of a weakening rupee and a record surge in Indian interest rates is prompting state-owned refiners to turn to dollar funding for oil imports and limit losses. Hindustan Petroleum raised $465 million in U.S. currency loans last quarter and Indian Oil sold $500 million in dollar-denominated bonds in July, according to data compiled by Bloomberg.
The Reserve Bank of India raised its repurchase rate by 2.25 percentage points in 2011 to a three-year high of 8.5 percent, the fastest monetary tightening on record in the country, to cool inflation. That pushed up borrowing costs for local companies and the government.
Rising Yields
Five-year bond rates for AAA rated Indian companies jumped 75 basis points this year to 9.69 percent, according to data compiled by Bloomberg. Similar rates are at 1.50 percent in the U.S. and 5.03 percent in China.
Ten-year government yields jumped 87 basis points in 2011, the most after Vietnam among Asia’s local-currency debt markets. The yield on the 8.79 percent security due 2021 rose one basis point to 8.80 percent today. The extra yield demanded over similar-dated U.S. debt climbed 223 basis points this year to 686 basis points. Rupee sovereign bonds returned 2.9 percent this year, while Indonesian debt earned 17.5 percent in the region’s best performance, HSBC Holdings Plc indexes show.
The average cost for credit-default swaps insuring against non-payment on the debt of seven Indian issuers has climbed 217 basis points this year to 416, 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.
“Inflation is a negative for bondholders of India’s government and oil refiners,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market bonds at Union Investment Privatfonds in Frankfurt, said in an e-mail on Nov. 22. "Should the rupee depreciate further, I can imagine seeing a gradual increase in rupee-denominated debt yields."
To contact the reporter on this story: Pratish Narayanan in Mumbai at pnarayanan9@bloomberg.net; Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net; Sandy Hendry at shendry@bloomberg.net
Rate this Page