Oil cos’ funds to flow in from MNC insurers

NEW DELHI: Oil companies could be accessing a new stream of funds, this time from overseas insurance firms. Oil companies such as RIL, IOC and now Petronet LNG could be raising close to $1 billion during calendar 2007 from some of the world’s major insurers to part-fund their projects.

There has been a growing appetite for Indian corporate debt amongst insurers such as AIG of the US and Standard Life of the UK who are constantly looking for long-term liabilities with tenures up to 10 years. Insurance companies, pension funds and mutual funds are looking to tap Indian paper to diversify their risks and increase their exposure to emerging economies.

Petronet LNG MD P Dasgupta said companies opt for such funds as these are available for a longer period and are available at competitive interest rates. “Our board has approved the proposal and insurers are conducting due diligence. They are almost quasi equity as we do not have to pay back for 8-10 years. The interest rates too are attractive, in the region of 6.5%. Also, as opposed to lenders who insist on 30% equity or internal accruals being invested upfront, these financiers are more flexible. It makes perfect sense for a company like ours which needs funds for expansion and may not still in a position to generate huge internal accruals just yet,” Mr Dasgupta said.

Indian Oil Corporation (IOC), for instance, is planning to raise $300 million for a 10-year period at a rate which is 140 basis points higher than the US Treasury securities.In a hardening domestic interest regime, corporates tap overseas markets for cheaper funds. Since international markets are flush with liquidity, corporates have access to a larger pool of money at low interest rates compared to India.

“For an investor based out of the UK or the US, subscribing to Indian debt will enable him to match his assets with his liability. For example, if the assets are in dollars but the liability is in another currency, the cost of servicing the liability will be exposed to exchange rate fluctuations. If both assets and liabilities are in the same currency, the movement is in tandem. Besides, an exposure to an emerging economy like India will help diversify risks. The investor can take advantage of various parts of an economic cycle by holding his assets across various currencies,” Edinburgh (UK)-based Standard Life Investments investment director Michael Dow told ET. Standard Life Investments has a total of $260 billion worth of assets under management.

Indian companies have been floating convertible bonds, which is quasi-debt for some time now. These are cheaper to raise in the US or the UK, since interest rates are lower, Mr Dow said. The yield on such debt will be higher in India than overseas, he added.

Indian companies raising debt overseas would need to be rated by non-Indian credit rating agencies. A company like Reliance Industries has issued debt at Libor plus 150 basis points. Reliance Industries is rated by non-Indian rating agencies. “Indian companies not rated by non Indian rating agencies would have to issue at much higher yields to compensate for the higher risk,” a rating analyst said.