MUMBAI, February 5: Indian Oil Corporation's Rs 300-crore debt issue has bombed. The private placement programme, scheduled to close on February 6, has been deferred till March.This is perhaps the first instance of a triple-A (AAA) rated company failing to mop up funds from the debt market. "No money came in for the issue because of the interest rate uncertainty," a merchant banker handling the issue admitted. The issue opened on January 12.
"We have decided to defer the placement as market conditions are extremely volatile and interest rate movements unpredictable," the source said. Industry sources cited the Reserve Bank of India's tight money measures-- unleashed on January 16--to contain the currency as the reason for the uncertainty. "No bank or wholesale investor wanted to invest at a time when uncertainty has taken over the market," a merchant banking source said.
The Reserve Bank hiked the bank rate by 200 basis points to 11 per cent and cash reserve ratio by 50 basis point to 10.5 per cent tosuck out liquidity from the banking system.
IOC took the private placement route and opted for book-building. The lead book runners to the issue were ICICI Securities (I-Sec) and JM Financial Consultants. The oil major planned to raise five-year funds at a band of 11.5-12 per cent. The paper carried a call and put option after three years. Sources said the company is likely to tap the debt market in March when liquidity improves. "We hope to come back with the issue in March when a government is in place and the interest rate uncertainty is over," the source said.
IOC entered the market to replace its foreign currency borrowings with domestic debt. "The failure of the issue will not affect the company's financials. It may seek to raise some dollar funds before it manages to relaunch the domestic issue," the source said.
The finance ministry recently allowed IOC to raise $ 500 million more in external commercial borrowings after it had exhausted its earlier limit. This apart, the oil major which enteredinto a swap deal with the State Bank for $ 400 million in December, can enter into such deals.
Insight
Victim of RBI's new policy
IOC is clearly the victim of the RBI measures, aimed at increasing short-term interest rates. That the long-end of the market has also been affected is clear from the revisions in prime rates and also by the failure of the IOC bond issue. The five-year bond had a put option at the end of three years and, hence, the relevant interest rate is the three-year rate. The yield to maturity for the government's 2000 11.64 per cent security is around 11.83 per cent, while the yield to maturity of the 2001 10.85 per cent is 12.04 per cent. These rates are for soveriegn debt. The rates for IOC should be slightly higher. Under these circumstances, the IOC coupon offer of 11.5-12 per cent is not attractive enough.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
