In India, rising spreads may spoil debt party

Top-rated Indian companies have seen a 10-20 basis points (bps) rise in credit spreads following Greece’s sovereign debt downgrade. They may turn away from the foreign debt market if conditions continue to deteriorate, say market players.

Credit default swap (CDS) spreads of the country’s largest lender, State Bank of India, had risen almost 20 bps to 164 bps since the downgrade was announced, according to Bloomberg data sourced from CMA Datavision. CDS spreads of Reliance Industries have risen about 10 bps to 139.1 bps since April 26.

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

QUICK NUMBERS Month-wise ECB/FCCB ($ million)
	2008-09	2009-10	%chg
April	1,160.82	298.63	-74.27
May	1,276.05	494.30	-61.26
June	1,615.25	1,919.04	18.81
July	2,471.81	2,015.22	-18.47
August	1,603.37	1,089.57	-32.05
September	2,834.95	1,509.57	-46.75
October	1,125.23	2,585.72	129.79
November	1,702.48	2,353.67	38.25
December	1,669.18	1,569.49	-5.97
January	1,337.08	1,319.81	-1.29
February	452.60	2,192.13	384.34
March	1,113.89	4,322.24	288.03
Total	18,362.71	21,669.38	18.01
Source: RBI Data compiled by BS Research Bureau

A senior executive with a leading private bank said rising CDS spreads might cause companies to reduce their dependence on overseas funds and turn to local soruces. The current crisis may cast a shadow on the overseas debt market, which saw strong growth in 2009-10 after a sharp fall in 2008-09.

Overseas borrowing by Indian companies in the form of loans and convertible bonds grew 18 per cent in 2009-10 on the back of increased appetite among investors for Indian paper.

Indian companies raised $ 21.67 billion (Rs 97,515 crore at Wednesday’s rates) through external commercial borrowing and foreign currency convertible bonds in the financial year up to 2009-10 compared to $18.36 billion (Rs 82,620 crore) in 2008-09, according to data released by the Reserve Bank of India (RBI).

In March 2010 alone, Indian companies took foreign loans worth $4.3 billion. According to bankers, the Greek crisis might spoil the party in the overseas debt market, where loan pricing for Indian corporates had been trending downwards for the past few quarters. A top-rated Indian corporate could expect a spread of 250 bps over the benchmark rate in the third quarter of 2009-10. Credit spreads had shrunk almost 100 bps to about 150 bps in the days preceding Greece’s sovereign debt downgrade.