Credit spreads for Indian firms touch 6-month high

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Companies may stay clear of debt markets for now, say bankers.

With credit spreads for Indian companies rising to six-month highs today, India Inc is likely to steer clear of overseas debt markets for now, investment bankers say.

Credit defaults swaps (CDS) on five-year secured bonds of ICICI Bank rose to a six-month high of 225.02 basis points (bps) on Tuesday, according to Bloomberg data sourced from CMA Datavision. The CDS spread of the country’s largest private sector company, Reliance Industries, touched a six-month high of 173.67 bps today.
 

CDS SPREADS
Company	19-Apr	18-May
SBI	140.13	194.96
ICICI Bank	170.64	225.02
RIL	129.59	173.67
Tata Steel	442.76	448.00
Tata Motors	368.40	408.60

State Bank of India’s CDS spread eased marginally to 194.96 bps after touching a six-month high of 200.64 bps on Monday. A month ago, SBI’s CDS spread was just 140.13 bps.

The spread reflects the cost of insuring an underlying security against default and is used to gauge an entity’s credit risk

Most loans in overseas capital markets are priced at the six-month London Interbank Offered Rate (Libor) plus a risk premium, known as the credit spread. Libor is the rate at which banks can borrow funds from each other in the London interbank market and is one of the most widely used benchmarks globally for short-term interest rates.

“If the CDS spread is going up, it is an indication that the loan price will also go up. There will not be any negative impact of the global economic changes. So far, India is perceived to be a good market,” said an investment banker.

“Very few people are going to enter the market at these rates. They will wait for the spreads to soften to more realistic levels,” said another investment banker.

Credit spreads on sovereign bonds as well a corporate debt have been rising ever since Standard & Poor’s downgraded Greece’s sovereign debt rating last month.

With no ebb in bad news from southern Europe, investors are turning risk-averse and steering clear of emerging market debt.