The Hindu Business Line : Cos keep away from ECB route as spreads remain high

Bangalore, Nov. 5 Access to the international credit markets remained choked off for domestic corporates keeping the pressure on domestic liquidity high.

Rating agency Crisil’s Chief Economist, Dr D.K. Joshi, said, “There is risk aversion among international lenders. So flows from External Commercial Borrowings (ECB) will remain low.” The risk aversion was evident from the high Treasury Euro Dollar or TED spreads. The spread is a keenly watched indicator for pricing of global credit. A wide spread indicated low risk appetite among global lenders/investors.

Currently, the spread as measured between the three-month Dollar Treasury bill and the three-month London Inter Bank Offered Rate (LIBOR) remains over 200 basis points. This implies that even high rated global borrowers are expected to raise funds at high spreads. The high spreads have resulted in the inability of Indian corporates to raise funds from the global credit markets. This is largely because India’s risk rating is investment grade. Therefore, the spreads would be far higher than officially prescribed ceilings. The RBI’s prescribed ceiling is currently 500 basis points over LIBOR for borrowings over 7 years’ maturity. Two years ago, domestic corporates were able to raise ECB funds at spreads as low as 100 basis points over LIBOR.

As a result, the conversion of RBI approvals into actual inflows remained low. For the month of September, the RBI’s approvals for raising ECB resources amounted to a little about $ 2.7 billion. But conversions this month or this year are expected to be less than 10 per cent. Even the public sector Syndicate Bank that had planned a Medium Term Note issue last year, has put it on hold. Syndicate Bank officials said, “How can we go into the market, when the spreads are still very high.” The public sector bank has, however, not shelved its $125-million MTN issue.

Infrastructure projects

For infrastructure projects access to ECBs have become difficult. Said GMR group’s Chief Financial Officer, Mr A. Subba Rao, “How can we access cross border resources at the current ceilings.” In fact, several corporates have now made a case for removing the ceiling prescription altogether. “We are not going to borrow at high costs,” said Mr Rao.

However, Mr Joshi said, “The current situation is not likely to continue for long.” Flows could start as early as next year, given the current liquidity pumping efforts.” The US Federal Reserve opened the liquidity tap since the beginning of last month, bringing the key Federal funds rate down to 1 per cent. In addition, the Fed also opened Swap Lines (A swap line allowed central banks to draw dollar-denominated funds from the Fed against their respective currencies at a predetermined interest rate) with several global central banks.

Bankers said that some of these efforts are likely translate into improving capital flows, including ECBs, in the coming months. That the flows had begun were evident from the falling Non-Deliverable Forward exchange rates. The one month NDF rate at present is about Rs 47.60. Two weeks ago, this rate had touched Rs 52. Moreover, the TED spreads, that were 490 basis points on September 23, are far lower now, even as the cost of borrowing remains beyond RBI limits. Domestic borrowers prefer to wait for some more time, till the TED spread narrows further. Alternatively, the preference is for less volatile sources — domestic bank credit.

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