he future Sri Lankan issuers will attract lower yields in the international capital markets, increasingly enabling them to tap into cheaper funds, according to a capital market expert.
According to the fund manager Dulindra Fernando, the lower yields will increasingly become possible as a result of many dollar-bond funds coming out of Sri Lanka, creating a greater secondary market activity continuously, putting pressure on the Lankan bond prices.
Currently, US $ 7.0 billion worth of Sri Lankan issued dollar bonds are listed on the Singapore Exchange (SGX) but the investors hold them to maturity due to near absent secondary market liquidity.
“We, as fund managers, create liquidity in the secondary bond market. We put pressure on the price (bond price). And since we buy more than we sell, the price goes up and therefore, the yield comes down,” Fernando said.
There is an inverse relationship between the bond prices and their yield in bond markets.
“So, when the next bank or the company issues a dollar bond, they can issue at a lesser yield,” said Fernando, who is also Ceylon Asset Management Company Limited (CAM) Managing Director.
Lower yields will help to reduce the overall cost of capital of the issuer, sovereign or corporate, increasing the market value and the competitiveness of the projects or products offered by such firms.
Since 2007, Sri Lanka has issued seven sovereign bonds to raise US $ 5.5 billion and in the 17 months to September, state banks have borrowed US $ 1.85 billion from international capital markets and a further US $ 100 million was raised by DFCC Bank PLC. (See Panel)
National carrier SriLankan Airlines in June this year raised US $ 175 million at 5.3 percent, the lowest rate so far achieved by a Sri Lankan corporate or a bank. The bond was 17 times oversubscribed.
This week, Bank of Ceylon hinted issuing its third dollar bond either by the end of this year or early next year. Last month, the capital market regulator, the Securities and Exchange Commission (SEC), licensed Sri Lanka’s first-ever dollar denominated unit trust managed by CAM, Ceylon Dollar Bond Fund (CDBF), with the approval from both the Central Bank and Finance Ministry. According to the SEC sources, another fund management accompany is currently in talks with the regulator to launch a similar dollar-bond fund. However, Fernando believes there will be at least 10 similar funds within the next two years by fund management companies with the Assets Under Management (AUM) reaching to at least US $ 2.0 billion by then. To put this in perspective, while US $ 2.0 billion might seem considerable, Singapore has over US $ 1.3 trillion AUM, more than 10 times of the size of its economy.
“What is challenging is building the first US $ 100 million in the fund base. Once the first US $ 100 million is up, it will take off quite fast,” he remarked. CAM targets US $ 100 million in the first 12 months in its CDBF reaching to US $ 500 million in two years. Meanwhile, according to CAM Director Michael Preiss, increased exposure to the dollar-bond space and the emergence of dollar-bond funds will kick start a virtuous economic cycle in the industry. “Overall access to international capital by Sri Lanka will gain recognition and reputation as an issuer among the investors. This will create more visibility. This will further improve the liquidity and yield curve for Sri Lankan bonds on the SGX,” he said. Among the other benefits, Preiss added that more issuances would improve the credit ratings and reduce the borrowing cost for future issuers.
“And of course it will help the industry growth. So there will be income for the management companies, trustees, auditors, legal professional and the rating agencies as well,” he further added. However, despite the Sri Lankan sovereign issuances so far have received multiple oversubscription levels, HSBC CEO for Sri Lanka and Maldives Patrick Gallagher last year said that the country might not receive oversubscription levels as high as seen in the past because nowadays the investors are not prepared to invest anything little more than what they really need.
“So, as we look to the next phase of the capital markets’ growth in the country, I think the country shouldn’t be worried if the oversubscription levels aren’t as large as they have been in the past,” he said at a business forum organised by the global rating agency, Standard & Poor’s.