US$ 1bn sovereign bond issue
But, at a price July 18, 2012, 8:21 pm
* US investors dominate
The US$ 1 billion sovereign bond issue floated in a troubled international capital market has seen overwhelming success after being oversubscribed by more than 10 times, the highest for any international issue by Sri Lanka, attracting a yield of 5.875 percent, a record low, the Central Bank said yesterday (18). However, this success comes at a price.
Although the latest bond issue, with a tenure of 10 years, comes at a historic low cost to the people of this country, economists pointed out to The Island Financial Review that if not for poor macroeconomic management, the cost could have been significantly lower.
US Treasury 10-year bonds yield around 153 basis points, which means Sri Lanka’s latest bond issue is paying a premium of 434 basis points. Last year’s bond issue which attract a higher yield of 6.25 percent, paid a lower premium of 332 basis points, Bloomberg data showed. The average risk premium on developing country debt was now 354 basis points according to an index compiled by JPMorgan Chase index, down from 441 basis points on June 01.
"Authorities ignored a balance of payments crisis for far too long. Meaningful and commendable steps have now been taken to rectify the problem, but the unwarranted late reaction meant that the people have had to suffer more than was necessary. Also, the risk premium on the latest sovereign bond issue could have been much lower if not for the problems we created ourselves. The Central Bank, Treasury and the government should feel relieved more than anything else at this stage. We missed an opportunity to raise funds from the international capital markets at a much lower cost, this needs to be looked into very seriously," a senior economist said not wanting to be named.
The peace dividend and high growth prospects have attracted investors to this bond issue, but as sovereign ratings agencies pointed out, weak external liquidity, moderately high and increasing external debt, fundamental fiscal weaknesses, high public debt and interest burden and political institutions that lack transparency and independence, continue to burden the people in many ways, one of which is the failure to lure investors at a lower cost.
Other economists and analysts shared this view, but were quick to point out that given the situation of the global economy, Sri Lanka could and should be pleased with the results of the issue.
Investors in the United States, accounted for the bulk of investments at 44 percent, followed by Europe at 29 percent and Asia 27 percent. The US government earlier this year moved a resolution targeting Sri Lanka at the UNHRC in Geneva.
Global Fund Managers were the largest investors in the transaction, representing 90 percent, with banks/private banks and others taking 6 percent and 4 percent respectively.
The full Central Bank statement regarding the issue follows:
"The Central Bank of Sri Lanka (CBSL), on behalf of the Democratic Socialist Republic of Sri Lanka (Sri Lanka), successfully launched and priced a US$ 1.0 billion 10-year International Sovereign Bond (Issue) at a yield of 5.875% per annum.
The Issue represents the fifth US Dollar benchmark offering in the international bond markets by Sri Lanka since 2007. Bank of America Merrill Lynch, Barclays Capital, Citigroup and HSBC acted as Joint Lead Managers/Bookrunners on the transaction. The People’s Bank acted as the co-manager on the transaction.
Prior to the launch of the transaction, Sri Lanka conducted a series of fixed income investor update meetings with investors in Singapore, Hong Kong, various cities in the USA and London.
Fitch Ratings, Moody’s Investors Service and Standard and Poor’s have rated the Issue at ‘BB-’ with a Stable Outlook, ‘B1’ with positive outlook and ‘B+’ with a stable outlook respectively.
With the strong support from investors and timely execution in the market, the Issue was announced during the Asia morning on July 17, 2012.
With the strong demand the order books grew rapidly, allowing Sri Lanka to price the Issue at 5.875%. This tighter yield reflects the improved confidence that the international investors have placed in the sovereign bond issuance of Sri Lanka.
The final order books stood at US$ 10.5 billion, an oversubscription ratio of 10.5 times. This is the largest order book as well as the largest number of investors in the order book for Sri Lanka ever. The number of investors increased to 425 from 315 in 2011.
Distribution was very well diversified, with Asia taking 27%, Europe 29% and the US at 44%. Global Fund Managers were the largest investors in the transaction, representing 90%, with Banks/Private Banks and others taking 6% and 4% respectively.
With this transaction Sri Lanka succeeded in achieving a cost of funds which is progressively lower compared to the previous Issuances. Sri Lanka’s previous four Issuances in 2007 (5-year), 2009 (5-year), 2010 (10-year) and 2011 (10-year) were priced at yields of 8.25%, 7.40%, 6.25% and 6.25% respectively. This achievement is all the more impressive, given the volatility seen in global capital markets in recent months," the Central Bank said.
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