The Government of India has announced an issue of special fertilizer bonds of Rs10,000 crore towards the payment of the subsidy dues to the fertilizer companies.
The issue is of 7.0% Fertilizer Companies Government of India Special Bonds, 2022 for Rs10,000 crore (nominal) to 23 fertilizer companies.
As these bonds do not qualify to be reckoned as an eligible investment in government securities, banks prefer not to invest in them, making these instruments illiquid.
As a result, the fertilizer companies are forced to liquidate these bonds at a discount to their par value. The bonds issued by the government in FY2008 were trading at 10-15% discount to their par value then.
Prima facie, the bond issuance of Rs10,000 crore by the government would resolve the liquidity issue faced by the fertilizer companies.
However, the earnings of the fertilizer companies could be adversely affected by the marked-to-market losses, if the bonds are liquidated at a discount to their par value.
Among the fertilizer companies under our coverage none appears to face any major downside risk to earnings estimates as a result of the liquidation of bonds at a 5-10% discount.