Credit default swap (CDS) spreads for Indian companies rose on Tuesday in the wake of Standard & Poor’s move to downgrade Greece’s sovereign rating.
Spreads on State Bank of India’s five-year secured debt rose 10 basis points (bps) to 154.4, from 144.41 on Monday, according to Bloomberg Data, sourced from CMA DataVision.
Reliance Industries’ CDS spreads rose by five bps to 134.52 from 129.10 on Monday.
The CDS spread reflects the cost of insuring an underlying security against default and is used to gauge an entity’s credit risk. The higher the spread, the higher the risk perception.
Investment bankers said the rise in CDS spreads was not likely to increase the cost of external borrowing for Indian companies by a large amount.
A good show by Indian companies in the previous quarter, foreign investors’ belief in India growth story and positive response to the Union Budget had recently pulled down the credit costs for Indian companies.
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“The rise is CDS spreads is not entirely surprising. While there is no direct link between Greece and India, CDS spreads have increased across the board,” said a senior executive of a UK-based investment bank.
“There is expected to be volatility in CDS spreads until May 19, the date on which Greece is likely to receive financial aid. However, there is liquidity in the market, so while investors will remain on the sidelines for the most part, they will buy on dips,” the executive added.
Greece expects to receive the first tranche of funds of $60.49 billion from the European Union/International Monetary Fund aid package by May 19, according to Greek Finance Minister George Papaconstantinou.
Separately, the 12-month London Interbank Offered Rate (Libor) moved above one percent for the first time this year, amid expectations the US Federal Reserve would tighten monetary policy. 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 capital markets are priced at Libor plus a risk premium, known as the credit spread.
Investment bankers are not perturbed by the rise in 12-month Libor. “The more relevant rates are three-month and six-month Libor, since most loans and bonds are benchmarked to these rates,” according to an investment banker from a foreign bank.
The three-month Libor rose one basis point to 0.338 per cent on Wednesday.