* Forward Eonia rate rises but seen falling* Longer-dated overnight rates come off highs* Repayment of second batch of ECB loans may push rates lowerBy Ana Nicolaci da CostaLONDON, Feb 13 Longer-dated overnight rates have come off recent highs and could see further downside after the announcement of the first repayment of the second round of European Central Bank loans next week. Money market rates rose in late January after the ECB announced euro zone banks would repay 137 billion euros of the cheap ECB funds that have kept the financial system afloat - more than the around 100 billion euros markets had expected. This time, money market traders in a Reuters poll are forecasting the ECB will announce on Feb. 22 that banks will pay back 125 billion euros of the ECB's second tranche of three-year loans at the first opportunity on Feb. 27. If banks pay less or even if the repayment comes in line, analysts expected longer-dated overnight rates could fall further.
"If you took a certain amount in the first and a certain amount in the second, in essence you can be effectively paying off what you took in the second by just paying back a bit more in the first," Simon Peck, rates strategist at RBS, said."There may well be a downside surprise in terms of what we get allotted."Eonia forwards that show where markets expect one-year Eonia rates to be in one year's time rose to 0.43 percent on Wednesday from around 0.40 percent the previous day but were off the 0.53 percent hit on Jan. 30, the day that the first repayment took place. Peck said the announcement of a smaller-than-expected allotment could see those rates fall to the mid 0.30 percent levels.
While a bigger-than-expected reimbursement would also lead to some market volatility, he expected the impact to be more muted because the excess liquidity in the financial system was not seen falling enough to have a lasting impact on overnight borrowing costs. ECB President Mario Draghi last week said he would monitor money markets to ensure policy remains "accommodative". He estimated that even after the initial repayments of the second of the ECB's loans, excess liquidity would not drop below 200 billion euros - the level at which overnight borrowing costs typically begin to rise. Excess liquidity currently stands at 497.4 billion euros."I think liquidity will stay sufficient to keep fixings soft," Peck added.
Eonia rates with maturities of six months to two years could correct lower after the repayment was announced, Giuseppe Maraffino, fixed income strategist at Barclays, said. Maraffino forecast the first repayment of the second round of ECB 3-year LTRO (long-term refinancing operations) to be broadly in line with the first pay-back of the first round of ECB loans."The second repayment will not be big enough to have a significant impact on the liquidity conditions ... so this means that the impact on the Eonia fixing should be negligible," Maraffino said. Overnight Eonia rates last fixed at 0.07 percent. Given their expectations that the Eonia fixing would remain below 10 basis point in the coming reserve periods, Maraffino said the Eonia curve was still too steep."Probably after the repayment, if it is in line with our expectation, with liquidity surplus remaining abundant... (there) is likely to be a further decline on the Eonia curve," he added. Longer-term money market rates, which fell after Draghi's comments, were little changed at around 0.17 percent on the one- year Eonia contract and up slightly on the two-year contract at 0.28 percent.
(Repeat for additional subscribers)June 9 (The following statement was released by the rating agency)Fitch Ratings has affirmed Indian Railway Finance Corporation Limited's (IRFC) Long-Term Foreign- and Local- Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IRFC's ratings are linked to the ratings of India (BBB-/Stable) due to IRFC's legal and funding ties with the Ministry of Railways (MoR). Fitch has classified IRFC as a dependent public sector entity. The company's strategy is dictated by the government of India, which tightly monitors and controls it. IRFC plays an important strategic role in India's railway sector because it is the sole financing arm of the MoR. The ratings derive strength from the MoR's ongoing support, as evidenced by regular equity injections into IRFC since its formation. IRFC's debt/equity ratio has been largely inside the 10x limit during the past three years. Fitch expects further capital injections from the MoR if the ratio exceeds the limit. The MoR injected INR6.0bn and INR6.3bn into IRFC in the financial year ending March 2013 (FY13) and FY14, respectively. IRFC is mainly involved in providing finance leasing to rolling stock such as locomotives, passenger coaches, and freight wagons. It financed around 25% of total funding to the MoR in FY13. Fitch expects IRFC to continue its collaboration with the government. Due to the large capital expenditure budgeted by the government, Fitch expects IRFC's debts to grow at 15%-20% per annum in the next two-three years. IRFC is wholly owned by the sovereign and its board of directors is appointed by the government. The MoR signs a memorandum of understanding with IRFC annually to set its operational and financial performance targets, which it reviews quarterly. The Comptroller and Auditor General of India appoints auditors to IRFC annually, enhancing government control.
Under the lease agreement between IRFC and the MoR, the MoR will cover any financial shortfalls by making advance payments for leases if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects that future standard lease agreements will continue to contain a similar assurance, and that the MoR will provide funding to prevent liquidity mismatches that could lead to an IRFC default. IRFC's profitability is resilient and highly visible since its interest income is charged on a cost mark-up basis, and the capital investment pipeline of the Indian railway sector is strong. Fitch expects the company's net profit to increase by around 10% per annum in the next two years, mainly due to the rise of outstanding lease receivables. Its assets and liabilities are closely matched. Its solid reputation in capital markets means the IRFC can easily access domestic capital markets and banks for low-cost long-term funding. RATING SENSITIVITIES
A positive rating action would stem from a similar change in the ratings of the sovereign in conjunction with continued strong support from the state. Significant changes to IRFC's legal status which would lead to a dilution of control or likelihood/timeliness of support by the sovereign may result in the ratings being notched down from the sovereign ratings. The full list of rating actions follows:
IRFC Long-Term Foreign Currency IDR affirmed at 'BBB-'; Outlook StableLong-Term Local Currency IDR affirmed at 'BBB-'; Outlook StableJPY12bn 2.85% term-loan due 2026 affirmed at 'BBB-'JPY3bn 2.9% term-loan due on 2026 affirmed at 'BBB-'USD200m 4.406% senior unsecured notes due 2016 affirmed at 'BBB-'USD300m 3.417% senior unsecured notes due 2017 affirmed at 'BBB-'USD500m 3.917% senior unsecured notes due 2019 affirmed at 'BBB-'