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Sri Lanka defies sceptics with benchmark bond
Real estate news By Rosie Slater
22 October 2007
Late Wednesday last week Sri Lanka finally issued its maiden sovereign bond (B+, BB-), succeeding in raising $500 million through a five-year 144A, Reg-S bond at a yield of 8.25%, or the equivalent of 397.5bp over five-year Treasuries. The deal was arranged by Barclays, HSBC and JPMorgan and co-managed by the Bank of Ceylon. Executing the bond was no easy task. The main political opposition party in Sri Lanka, the United National Party (UNP), held a number of press conferences and public demonstrations objecting to the offering, and argued that the bond was improperly authorised. The UNP also threatened not to honour payments on the bond, should the party come into power. Legal experts have since certified the bond complies with Sri Lanka’s foreign loan regulations.
Investors have also had to contend with the ongoing civil war between government forces and the Tamil Tigers, which led Fitch Ratings to place the sovereign on a negative outlook in 2006. The agency has maintained its stance yet again this year. advertisement At 8.25%, one investor believed the deal was expensive compared to Pakistan (B+,B1), which at the time of pricing was trading at 8.04% for its 2016s, and 8.22% for its 2017s. Others say the price reflects the risks in Pakistan. “Benazir Bhutto’s arrival from exile in Pakistan triggered two massive bombs attacks, killing 130 people and causing the sovereign's credit default swap to widen by up to 10bp. In my opinion, the risks of a violent regime change are much higher there than they are in Sri Lanka.”
When questioned about the threat of default by Sri Lanka's opposition party, he said: “Opposition parties always make life difficult for the ruling party. It wouldn’t make sense for them to actually carry out that threat since this would be harmful to Sri Lanka, its prospects for growth and attracting foreign investment. Anyway, even if they do, I have time to work my position out if I don’t like it. Elections are in 2010.” He adds: “It’s a credit were there will be continued negative headlines and tension, but I take comfort from the country’s excellent sovereign debt service record.” Economically, the country suffers from weak public finances, high public debt ratios, and a weak financial system. Inflation has risen sharply (averaging 17.3% in 2007), while the fiscal deficit and public debt have remained high in 2006 at 7.3% and 93% of GDP respectively, according to a Fitch report.
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