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Overseas credit has gone cheaper
Aug 6, 2014


With Modi Government taking charge, the economic sentiments have turned positive. And the shift is obvious not just in India. The perception of an economic revival has made way abroad as well. This is the reason why the cost for Indian firms to raise funds abroad has come down. As the chart suggests, the average spread over LIBOR for such borrowings has come down by more than 50 basis points in the last few months. In fact, as an article in the Economic times suggests, even the companies with ratings that do not qualify for investment grade are witnessing investor appetite.

This also suggests that one can see a spurt in overseas borrowings as economic sentiments improve further and companies in India plan capacity expansion. While this may support capex plans of the firms, such firms will become highly vulnerable to forex risks. As we have experienced in the past, forex rates can be volatile enough to negate effect of the low interest rates on the ECBs. One must note that earlier in 2008, cheap foreign borrowings lured a lot of companies to expose themselves to foreign debt. However, as the economy slowed down and market sentiments turned negative, paying back the bonds became a tough task. Such debt resulted in stretched balance sheet subjecting India Inc.'s creditworthiness to risk. In some cases, shareholders in such firms burnt their fingers. Hence, as the trend gains momentum again, we believe investors must keep a close watch on such firms and ensure the company's ability to hedge and deal with such risks, in case they materialize in future.

Data Source: RBI & Business Standard

This Chart Of The Day was published in The 5 Minute WrapUp - Cash is King. But not for Infosys.

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