ECBs turn dearer after Gen Motors downgrade

Indian financial institutions and corporate entities planning to raise an estimated $2 billion debt from the overseas market might find the going dearer.

This is because yields on Indian papers have moved up sharply by 5-10 basis points in the recent past. This follows Standard & Poor's downgrading of the world's largest car maker General Motors, after the company issued a profit-warning on its first quarter results.

Global investors are therefore finding it more attractive to invest in their home markets with the US 10-year treasury yields rising "" they have already hit a 9-month high after the US Federal Reserve increased its funds rate by 25 basis points on Wednesday

Secondary market trades of State Bank of India's paper was ruling at 73 basis points (bps) above the London Inter-Bank Offered Rate (Libor), ICICI Bank at 87 bps, IDBI at 97 bps and Exim at 75 bps yesterday.

"If foreign investors can get the same yield for paper of similar quality, they are likely to return to investing in their own home markets," said Brijesh Mehra, executive director, global clients head, India, ABN Amro Bank NV.

Banks such as the State Bank of India and ICICI Bank as well as leading corporate manufacturing companies have indicated plans to tap the external commercial borrowings (ECB) market following the relaxation in norms.

With yields rising in the secondary market, and new issuances being priced off secondary trades, "it will become more expensive for Indian corporates to tap the market," said senior investment bankers.

General Motors currently has over $300 billion outstanding debt. This works out to half of India's gross domestic product. If its bonds are downgraded to sub-investment grade, their prices will fall and yields shoot up, making it an attractive investment.

S&P's revised outlook for GM to 'negative' from 'stable' is a reflection of the heightened concerns regarding the profit potential of the company's core North American automotive business in the wake of the warning, reported the global rating agency.

Interestingly, the scenario in the stock market is no different as foreign investors are selling their holdings in emerging markets across the world.

Analysts pointed out that with the hike in the US Fed rates and the US Federal Reserve talking of inflation pressures, not to mention the rise in consumer prices, hints at faster rate hikes. This dampens the investor appetite for emerging markets.

Investor insight

• Yields on Indian papers have moved up sharply by 5-10 basis points
• Global investors are finding it more attractive to invest in their home markets with the US 10-year treasury yields rising
• Banks such as the State Bank of India and ICICI Bank as well as leading corporate manufacturing companies have indicated plans to tap the ECB market