Foreign currency credit has become expensive for Indian banks, financial institutions and companies due to the foreign investors’ risk aversion to emerging markets following the US subprime crisis. According to dealers tracking the international corporate bonds market, most of the bonds/papers floated by Indian companies and banks such as Tata Motors, Reliance Industries State Bank of India, ICICI Bank, Exim Bank, Canara Bank and Bank of India, among others, have become illiquid.

The holders of such papers basically buy derivatives like credit default swap (CDS) to hedge against default by such entities. Since the trading in such papers has turned illiquid, the spreads at which the CDS is being traded indicates the pricing at which these institutions or companies could raise funds in the overseas markets. “The spreads indicate basically the rates over LIBOR at which the holders of such illiquid papers are buying the credit default swap ( CDS) as a hedge “, said a dealer.

LIBOR (London Interbank offered rate) is the international interest rate benchmark which is reset every six months. CDS is the derivative on the underlying of any form of credit to an Indian bank or financial institutions or corporates which will help the investors in such papers to protect against defaults. In the international markets, corporate credit is priced as spreads over the benchmark rate of LIBOR. One basis point is one hundredth of a percentage point.

The spread over CDS on the SBI paper, prior to the crisis, was 40 basis point over LIBOR. It has now moved up to 100-120 bps. Similarly, the CDS for ICICI Bank has moved up from 50-60 basis points over LIBOR to 120-130 bps. While the papers floated by SBI and ICICI were bonds, Exim Bank, Canara Bank and Bank of India had issued hybrid bonds. According to dealers, the spread on EXIM, Canara and Bank of India, among others, have moved up from 50-70 bps over LIBOR to 100-150 bps.

Among the frequently traded papers of Indian companies, the CDS on Reliance Group has gone up from 50 bps over LIBOR to 100 bps, Tata Motors CDS is at 200 bps over LIBOR as against 80 bps earlier. Banks helping Indian companies to arrange foreign currency denominated loans explained that the pricing for the Indian papers has on an average gone up by 50-60 basis points after the general risk aversion to emerging markets.

However, bankers clarified that these rates will be valid only if these entities go to the open market and not borrow through bilateral negotiations with correspondent banks where one gets a lower rate depending on the relationship.