Dubai crisis may push up cost of overseas credit

The Dubai crisis may increase the cost of funds for India companies, particularly those with business interests in West Asia.

Credit risk spreads, reflecting a premium over the benchmark lending rates that companies pay for credit, have moved up in the range of 10 to 18 basis points in the last few days.

Joiel Akilan, chief representative (India) of Spanish bank BBVA, said, “The developments in Dubai have made bankers cautious. They will put deals under the magnifying glass. It will impact the way lender price loans.”

The premium that borrowers would have to pay over the London Inter Bank Offered Rate (Libor) have not, however, shot up the way they did a year ago when spreads had jumped 750 basis points for some Indian companies in the aftermath of the collapse of Lehman Brothers.
 

SPREADING CONCERN
	Credit Default Swap Spread
	25-Nov	26-Nov	27-Nov	30-Nov
ICICI Bank	189.40	195.96	206.29	196.50
Reliance Industries	151.32	153.62	154.70	154.20
SBI	118.20	121.36	129.66	125.71
Tata Motors	574.60	574.60	574.60	594.50
Tata Steel	643.14	652.43	654.86	647.60
Corporate securities in USD for 5 years                           Source: Bloomberg

The head of treasury with a large Indian bank with branches in West Asia said the situation was evolving and the market was influenced by uncertainty. Although there was no panic, the long holidays in Dubai added to the discomfort.

This was reflected in the rise in risk spreads, he said.

Global rating agencies S&P and Moody's have downgraded the credit ratings for several government-related entities in Dubai. The implications are likely to keep the market on tenterhooks and provide direction to the market risk appetite in the near-term.

A senior State Bank of India official said the risk associated with Indian papers may also go up. A large number of Indians work in Dubai and United Arab Emirates and Indian companies also have exposure due to investment or project business, factors that would increase funding costs going forward. A clearer picture will emerge in 10 or 15 days, he added.

In a note, ING Vysya Bank said though the initial fright in the market has eased, the market was likely to remain cautious in the near term. Credit rating downgrades at places might impact the debt-raising capacity of certain companies.

Rating agency ICRA has downgraded the rating to loans extended to DP World’s (a transport and logistics arm of Dubai World) two containers terminals – Chennai and Nhava Sheva.

Senior executives with public sector and foreign banks said while the cost of funds could go up, the rise would not be substantial and was not expected to hamper the flow of funds to India, they said.