We document that positive correlation between corporate and sovereign cost of funds borrowed on global capital markets weakens during periods of unusually high sovereign spreads, when corporate borrowers are able to issue debt that is priced at lower rates than sovereign debt. This state-dependent correlation between sovereign and corporate cost of funds has not been previously documented in the literature. We demonstrate that this stylized fact is not explained by a different composition of borrowers issuing debt during periods of high sovereign spreads or by the relationship between corporate and sovereign credit ratings. The decline in the correlation between corporate yields and sovereign yields is observed across countries and industries as well as for a given borrower over time. We propose a simple information model that rationalizes our empirical observations: when sovereign spreads are high and more volatile, spreads on corporate debt are less correlated with spreads on sovereign debt. The calibrated model matches well the empirical correlation between sovereign and corporate cost of funds during normal and crisis times and is able to explain the heterogeneity in the estimates across market segments.