Falling interest rates and thinning credit spreads could be a pointer to international markets gradually opening up for top-rated Indian companies.

The London interbank offered rate, or Libor — the reference rate to which most international borrowings are linked —slipped below 0.6% on Friday for the first time, after Fed said it was hopeful about prospects for the global economy. The rate had peaked at 4.8% following the collapse of Lehman Brothers last year.

However, bankers say it may be a while before good old times of record borrowings are back, since overall borrowing costs remain fairly high and Indian debt is under negative watch by most rating agencies.

Indian companies, however, pay an extra "credit spread" over this rate, when they borrow from global banks. This, bankers say, has to cool down, before overseas borrowings find their groove again. Over the past three years, Indian companies have borrowed more than $ 70 billion from international markets, as per the RBI data.

"After hedging for interest rates and currency movements, borrowing in domestic markets is still cheaper than that for overseas markets (for highest quality corporates)" said Paritosh Kashyap, executive vice-president, debt capital markets at Kotak Mahindra Bank.

"Credit acceptance for Indian companies is yet to return to pre-Lehman levels," he added.

Bankers explain that credit spread for five-year loans still remains high at around 350 basis points, as against 75-125 basis at the same period last year. This would mean that the cost of an overseas loan would be upwards of 10% a year (including hedging costs.) The same would be available at around 9% from local banks and still lower, if the company sells its bonds.

But a look at the movement in ICICI Bank’s CDS shows that the risk appetite for Indian companies is slowly improving. This derivative instrument traded in global markets is widely considered as a barometer of market's perception for, or credit worthiness of, Indian companies.

The CDS spread, which quoted in a range of 80-100 bps throughout the whole of the last bull phase, had risen to nearly 1,800 bps (18%) after collapse of Lehman. On Friday, it quoted just over 300 bps, first time since December 2007.

A CDS is the market's estimate of insurance for loss on securities in the event of its default.

"CDS narrowing is a tribute to the good liquidity conditions in global markets and the willingness among players to take greater risks," said Partha Mukherjee, president, corporate banking at Axis Bank. "We are already seeing a pick up in companies tapping overseas loans and expect the trend to continue."

Source : ET