Subprime rout makes Indian CDs expensive

MUMBAI: State Bank of India’s credit default swaps (CDs) saw a sudden spurt in activity, with prices moving up by more than 100% over the previous close. The five-year CDs of SBI on Friday traded at $103 which went up 105% to $213. This type of movement was not experienced by other Indian companies which have CDs based on their international debt.

Credit default swaps are derivatives based on foreign debt and act as an insurance for those who have purchased the debt. Assume firm A has lent money to firm B, and wants to lower the risk arising from a possible default in interest payments by B. Firm A can buy CDs from another player X by paying a premium. If B defaults on interest payments, X will make good the payment to A.

Brighter the chances that B will service its debt, lower will the premium for CDs, and vice-versa. In general, a rise in prices of CDs is considered negative, as investors would perceive that the corporate in picture may not be in a position to service its debt obligations.

Market experts associate this movement in SBI to the overall jittery mood among investors in the credit market around the globe. “There is a lot of demand for Indian paper, and sometimes, we see some odd trades happening at high prices,” said a senior debt trader. But, it was only on July 3 that the same SBI debt was traded at $51 and now it’s at $213 after the global fall in equity markets due to the rout in the subprime loan market.

Prices of CDs for most Indian companies have nearly doubled over the past one month because of the rumbling in the subprime loan market in the US. In the last couple of trading sessions, Reliance Industries and ICICI Bank have seen a fall in prices of their debt swaps, as global markets stabilised. Apart from SBI, Tata Motors, too, is seeing a rise in CDs of its debt over the previous trading session. Prices for Indian CDs can be seen on the Bloomberg terminal.