Essar Oil's 14 per cent 2003 bonds are quoting at a highly discounted price of Rs 60 on the National Stock Exchange after Credit Rating Information Services of India Ltd (Crisil) downgraded various Essar debt issues on April 29.
The bonds were quoting at around Rs 72 prior to the downgrade, clearly indicating that the market had discounted the risk on the debt much before the rating actions.
However, after the revised rating the price has steadily fallen, closing at Rs 60 on May 21 on the NSE debt market sector.
A purchase price of Rs 60 for a Rs 100 bond gives a yield of around 33 per cent. The debt issue was downgraded as some funding was not tied up. Market players said the price of the bonds will look up only after the funding is tied up.
Crisil had downgraded Rs 765 crore worth of non-convertible debenture issues of Essar Oil to C from BB plus as the company had not tied up funds for a project. With the new rating, Essar Oil slipped to the substantial-risk category, down from the inadequate-safety rating. A Crisil press note said the revision in rating reflected the residual funding of the project being untied.
The disbursement in respect of the facilities already sanctioned by the lenders was subject to successful mobilisation of funds committed by the company, viz, additional equity of Rs 210 crore and foreign currency convertible bonds of Rs 585 crore.
Crisil said in case the company failed to bring in these funds it could face difficulties in debt servicing of the outstanding non-convertible debentures.
Besides, the risk profile of the company has been affected due to escalation in project cost funding characterised by a higher proportion of debt, depressed refinery margins in the Asia-Pacific region, expected surplus situation for some of the refinery products and uncertainties relating to implementation of tariff protection recommended by the Nirmal Singh committee.
Essar Oil is implementing a 10.5 mtpa capacity project at Vadinagar in Gujarat. The scheduled commissioning of the refinery in April was delayed due to funding constraints coupled with the cyclone that hit Gujarat in June 1998.
