Local credit may still be cheaper than dollar bonds

Although local interest rates are rising, businesses may find credit here cheaper than tapping foreign bond markets. With the yield on 10-year US Treasuries now falling from 4% to around 1% at the start of the year, spreads widening and the term premium increasing, dollar bonds have become much more expensive.

“Spreads have widened significantly for investment grade securities and even more so for emerging market issuers. In turbulent times the risk premium has increased and sentiment is weak,” said a senior banker. Yields, since January, have been between 50 and 150 basis points for prime borrowers and even higher for those with lower ratings.

With the yield on the US Treasury having risen by almost 300 basis points since January, the total cost of borrowing has jumped by 400 to 450 basis points. In addition, with investors having suffered mark-to-market losses, there is also a flight to quality.

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For example, a 10-year bond issued in January with a coupon of 2.8% is now trading at a yield close to 5.8-6%. Therefore, for the same borrower, adding hedging costs, the total issuance cost could now reach 9.5-10%. In our country, the banks would be ready to disburse a loan in rupees at 8-8.5%. Furthermore, there is also appetite in the corporate bond market with insurers and provident funds looking for good quality paper.

Appetite in the overseas loan market remains strong, bankers said. As such, for businesses that have dollar revenue streams, dollar loans, which are priced above the SOFR secured overnight rate, can be a cheaper option than rupee loans. Spreads in this market have increased by around 50 to 60 basis points, they said.

By early 2022, several borrowers, including Reliance Industries and State Bank of India (SBI), had tapped into the bond markets. SBI had mopped up $300 million via five-year Formosa bonds at a very tight spread of T plus 100 basis points; bond yields rose about 40 basis points. However, since the Fed indicated that it would tighten monetary policy and withdraw its accommodative measures, markets have become turbulent. The worrying geopolitical situation weakened sentiment. Investment bankers have said that appetite for investment grade papers needs to recover significantly before investors start turning to high yield papers.

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