IFR News: The Democratic Socialist Republic of Sri Lanka nailed a perfect window to issue a US $1.5 billion dual-tranche bond offering, securing a vote of confidence from international investors as it starts tackling its fiscal problems.
The long-awaited 5.5-year and 10-year bonds launched on what a banker described as one of the best days in Asian primary this year - financial markets had stabilised after the volatility caused by the UK vote to leave the European Union, US payrolls data last Friday pointed to the Federal Reserve keeping rates steady this year and Sri Lanka’s outstanding sovereign bonds rallied.
The country’s 6.85 percent November 2025s were yielding around 6.7 percent on a bid on Monday, the tightest level since that US $ 1.5 billion bond was issued last year, according to Thomson Reuters data.
Markets were looking so good last Friday that bankers accelerated the timing by a day. A good backdrop was crucial for Sri Lanka, which needed to persuade investors that a three-year US $ 1.5 billion International Monetary Fund (IMF) loan approved last month will help put the country back on track to fiscal consolidation. The government also appointed a new Central Bank Governor Indrajit Coomaraswamy, putting an end to uncertainty after the previous governor had declined to seek reappointment.
The backdrop worked in Sri Lanka’s favour. The result: a more than US $ 5.5 billion order book, participation from the top four global funds that placed triple-digit tickets, and a negligible new issue premium on the 10-year.
“We were able to engage high-quality, huge global EM funds, which shows that they were able to regain their faith in this country,” said a syndicate banker involved in the trade.
Another investor said, “Sri Lanka had a good macro story since the approval of the IMF loan and the appointment of a new Central Bank governor.”
The new bonds were both trading around 101 this morning in the aftermarket.
Pricing
Final pricing of 5.75 percent and 6.825 percent came well inside initial guidance of around 6.125 percent and 7.125
percent, respectively.
The 10-year was seen as pricing through its existing curve, based on fair value estimates of around 6.84 percent-6.87 percent that were reached by adding 13bp to its outstanding 6.85 percent 2025s, according to bankers.
On the 5.5-year, fair value was estimated at 5.66 percent, based on a hypothetical curve drawn from the somewhat illiquid
2021s and 2022s.
Another banker on the deal said outstanding bonds are expected to tighten now that the new bonds have introduced a tighter,
liquid benchmark.
“The new 5.5-year almost eliminates the need for a sukuk,” said the banker.
A senior Finance Ministry official told IFR in April that it was eyeing a sukuk and its first Chinese renminbi-denominated
notes this year.
The US $ 500 million 5.5-year portion was 37 percent allocated to Europe, 35 percent to the US, with the remainder going to Asian investors. The US $ 1 billion 10-year was 62 percent distributed to the US, 28 percent to Europe and 10 percent to Asia.
Fund managers accounted for a majority of both tranches, taking 85 percent and 91 percent on the 5.5 and 10-year
notes, respectively.
A banker away from the deal said the pricing looked aggressive, but said when a market is yield-suppressed, people are going to flock to deals like Sri Lanka. It also helps that the country is an established issuer and the bonds are index-eligible, he said.
Macro issues
The IMF loan, approved on June 3, aims to alleviate pressure from the fall in foreign currency reserves, which have dropped below the amount of short-term debt.
But the Extended Fund Facility’s main goal is to spur reforms such as reducing the budget deficit from 7.4 percent of gross domestic product (GDP) in 2015 to 3.5 percent by 2020, increasing revenue to GDP, undertaking public financial management reform and improving the finances of weak state enterprises.
Moody’s said in a report last month that based on similar cases, reaching the ambitious fiscal targets set by the EFF programme entails risks, a concern that prompted it to cut the sovereign’s outlook to negative from stable on June 20.
Sri Lanka may also be affected by a slowing British economy following the UK’s decision to leave the EU, which could slow nominal GDP growth and make it hard to lower the deficit.
The tea-exporting country has the highest exposure to the United Kingdom as a percentage of its exports compared to other Asian emerging-market countries. Britain is its second largest export market, accounting for 9.9 percent of total exports, according to Asia Frontier Capital.
The 144A/Reg S notes are expected to be rated B1/B+/B+, which is on par
with the issuer.
Citigroup, Deutsche Bank, HSBC and Standard Chartered were joint bookrunners.
