100bn Fertilizer Bonds – Marginal Impact

Govt. will issue INR100bn of fertilizer subsidy in the form of Bonds. This issue of bonds forms ~10% of total estimated fertilizer subsidy for FY09, which is higher than our expectation of ~5%. However we believe the companies will realize cash and minimize losses on discounting these bonds through a delayed sale to institutions given further rate cuts expected in FY09.

These bonds will bear a yield of 7% till maturity in 2022. They are being issued at par and are not eligible to be kept with banks under SLR requirement. The bonds can be bought by insurance companies in the “other approved securities” list and also by PF/Gratuity/Superannuation funds as special bonds. Moreover, these bonds are also eligible for repo transactions.

While Chambal Fertilizers will receive INR2.16bn and Tata Chemicals will get INR6.12bn worth of bonds, we expect these companies to wait for the discount to narrow before selling the bonds and hence minimize losses.