The State Bank of India (SBI) has expressed reservations about picking up the recent bond issues made by the Punjab State Electricity Board (PSEB). It has also asked its subsidiary SBI Caps to avoid handling any of the Himachal State Electricity Board issues on the grounds that these states have built up an excess of contingent liabilities.
The PSEB has entered the financial markets with a Rs 350 crore bond issue ( Rs 250 crore plus Rs 100 crore as green shoe option), using the private placement route. The issue, unlike in the past, is unrated. Himachal Pradesh is also expected to hit the market with another issue. For the seven year offering, PSEB has offered a coupon of 14.4 per cent payable on a half yearly basis, which is about 1.5 per cent more than the prime lending rates. This is PSEBs third offering for the current year, all being done through a private placement basis. HSEB is also due to hit the market shortly with identical coupons.
The initial rounds of borrowings by the state were done on a structured obligation basis, indicating that in the event of in the SEB's revenues to meet its debt service obligation, the state would intervene meet the shortfall through budgetary transfers. However, SBI officials says that this mechanism was no longer sufficient to provide comfort to investors in the bond issues, since the contingent liabilities of the state has already reached the upper limit or had exceed the revenue flows of the state.
Punjab has also provided guarantees for borrowings other public sector undertakings like Punjab State Industrial Development Corporation lining and to independent power producers . In addition to these categories of borrowings, the state has also provided guarantees to institutions like the Housing and Urban Development Corporation and Life Insurance Corporation.
The bank has cited that all the bond issues made in the last few months by the state's public sector undertakings or electricity boards have been used to meet revenue expenditure as opposed to capital expenditure. As a result the electricity boards on their own may not be in a position to meet the repayment or interest payment obligations. Consequently the risk of the guarantees being invoked was very high in these states SBI officials said.
The bank's refusal to pick up the issue comes despite the fact that bonds issued with state government guarantees are to be treated as zero risk weighted assets, and as a result no capital adequacy need to be provided. This is the first time that bond issues made by SEBs are facing resistance, signaling a tightening of the markets for potential high risk borrowers.
The officials said that the SBI and all its subsidiaries were closely looking at the debt service ratios of the state. The debt service ratio of the states could completely undergo a change if the borrowings of the state public sector undertakings are also factored. Currently the state exclusive of the borrowings by the interest payments as a of total revenue receipts is about 32 per cent.
However, the officials estimate that if guarantees are invoked the ratio would be over 40 per cent of the gross revenues of the state which include central transfers from the share of central taxes.
