The Hindu Business Line : Cos unlikely to take ECB route as spreads are high

Bangalore, Sept 23 With rising risk spreads domestic corporates are unlikely to access foreign currency funds, despite further liberalisation of external commercial borrowing (ECB) guidelines.

The three near bankruptcies, staved off only by US Federal Reserve bail-outs, resulted in a steep increase in dollar risk spreads. The risk spreads, as measured by TED (Treasury Euro Dollar) spread, was a steep 490 basis points. TED spread is keenly watched in the global financial markets as a widening spread indicates lower lending risk appetites.

Bankers said that there were already a clutch of potential entrants into the ECB markets, but borrowing programmes are virtually on hold. The new RBI guidelines allow a spread of up to 450 basis points over the London Inter Bank offer rate for 7-year borrowings.

However, according to HDFC Bank’s chief economist, Dr Abheek Barua, “Given the state of global liquidity, risk spreads for Indian entities will be high.”

With India’s sovereign rating at investment grade, bankers said spreads are not likely to be below 500 basis points, well above the RBI’s new ceilings.

Alternatives

Borrowers like the Industrial Development Bank of India were instead scouting for alternative opportunities such as the Yen borrowings. IDBI’s Yen offering for raising the equivalent of ¥100 million was expected to close by the end of this month. The deal is likely to be the benchmark for domestic corporates’ return to the global markets, traders said.

However, it is the new borrowers who are facing the impact of hardening spreads. At 500 basis points over LIBOR, all inclusive costs including hedging costs were likely to be well into double digits, traders said.

Six month LIBOR is currently about 3.1 per cent. The costs are therefore likely to be closer to about 11-12 per cent.

Two years ago, Canara Bank issued a Medium Term Notes was priced at just 125 basis points over six month LIBOR. which at that time was around 5.4 per cent.

A trader with a public sector financial institution said, “In the current global environment, even Indian public sector entities cannot think of those spreads.” “At such rates, domestic credit markets are far more cost competitive,” they said.

High credit offtake

This was one major reason for the high credit off take from domestic banks.

This year so far, credit off take from the banking system was close to about Rs 96,000 crore, or a 210 per cent increase over the corresponding period last year. The offtake was mostly from the industrial sectors including infrastructure and power.

For the infrastructure sector, debt servicing costs are expected to have big impact on bottom lines.

Traders said it was to avert the impact of high funding costs that borrowers were looking to domestic markets, with the hope of refinancing the same when rates sink.