Cost of funds falls as India seen more stable than other emerging economies
The risk of owning an Indian corporate bond has dropped the most compared to markets like China and Russia as well as troubled developed nations like Spain and Portugal in the last one month.
Credit default spreads (CDS) for Indian companies have fallen 19-57 basis points (bps), while China has seen a drop of 11 bps and Russia of 16-30 bps. Developed countries have seen an increase. The CDS spread reflects the cost of insuring an underlying security against default and is used to gauge an entity’s credit risk.
Indian companies availed of five-year loans at a spread of 152 bps over the London Interbank Offered Rate (Libor), compared to 181.97 bps a month before. Libor is the rate at which banks 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. Most loans in overseas markets are priced at Libor plus a risk premium, known as the credit spread.(Click for table)
Companies such as Tata Power and Tata Motors saw a significant drop in spreads and secured loans at 322.2 bps and 241.8 bps above Libor. Those with lower ratings were unable to raise funds from the overseas market in the beginning of the financial year.
The spreads for Reliance Industries’ five-year secured debt fell from 171.39 bps to 147.38 bps on January 7, according to Bloomberg data. Tata Motors saw an even sharper fall in five-year secured spread, which was 241.8 bps on January 7, compared to 295.6 bps a month before.
“CDS spreads across emerging markets have eased over the past few weeks. Emerging economies like China and Russia have been performing well and so their spreads are low. But countries like Spain and Portugal have seen some trouble, resulting in a rise in spreads for them”.
Perception
India’s positive outlook has helped the spreads ease further.
“India is relatively better placed than China on the economic front and is maintaining grip and growth. The yuan will find its own level as China loses the grip and the Chinese central bank will get affected. Also, India is sure of a sovereign upgrade that will open access to liquidity for Indian companies at an affordable cost,” said IndusInd Bank’s head of global markets, Moses Harding.
Industry experts say the spread is an indicator of how the market is perceived.
The spreads are determined on the basis of sovereign risk, economic growth and the company’s performance.
“There are more funds chasing Indian assets. Indian companies will get similar spreads in the coming months,” said BBVA Chief Representative Joiel Akilan.
Credit perception of the Indian market has improved over time. A senior State Bank of India executive said, “Earlier, global markets saw only two categories — companies and financial institutions from developed and developing countries. In 2010, investors moved further to do micro analysis. The rating of a country, though crucial, is no longer the overriding factor in influencing pricing. While pricing the paper, they factor in liquidity and interest rates. The spreads have come down for us due to confidence in balance sheets, transparency in the system and disclosures.”
He expects spreads to harden in 2011 due to an earlier-than-expected recovery in the United States and withdrawal of fiscal stimulus, which is expected to lead to contraction in liquidity.
The euro zone, on the other hand, is in trouble and the European Union has given liquidity support as well as rescue packages to member countries. The spreads for these countries will remain volatile and elevated till their economies improve.
