Lankan banks and finance companies in debenture rush

In what appears to be an apparent race to raise the much needed capital, as many as eight issuers have either announced or indicated their plans to raise as much as Rs.49 billion through listed debenture issues, all within next 12 weeks.

Interestingly, all these issuers are either banks or finance companies who remain hungry for liquidity to fund their asset growth. 

According to a study carried out by Mirror Business, five out of the eight issuers are banks and the rest finance companies.

Some suspect the rush to issue listed corporate debentures is to avoid possible lifting of exemption given on withholding tax on interest earned on listed corporate bonds in the forthcoming budget as the government is in the hunt for all sorts of revenue avenues. 
After continuous lobbying by capital market participants, the budget 2013, under Rajapaksa administration, exempted the withholding tax on interest earned on listed corporate debt to incentivize issuers to raise capital via debt instruments and promote capital market development.
The measure in fact gave some boost to an otherwise latent debt capital market. 
In 2015 alone 25 corporates raised as much as Rs.83.4 billion via listed debentures while the corresponding amount for 2014 was Rs. 54.2 billion and Rs. 68.3 billion in 2013.
Meanwhile, many issuers have also cited the funds raised are partly intended for funding their loan growth as they still see some robust demand for lending as the underlying economy is still remains strong, despite the monetary tightening measures undertaken during this year. Sri Lanka’s private sector credit growth picked up to 28.5 percent in July on a year-on-year basis from 28.2 percent a month ago. But on an absolute basis the credit extended to the private sector slowed down to 62.8 billion from Rs.75.9 billion a month ago.  However, the Central Bank expects this growth to slow down to around 18 percent to 20 percent level by the end of the year as there is usually a 12 to 18 months lag in monetary policy transition. 
However, the International Monetary Fund last week asked the Central Bank to remain watchful to tighten further should the inflation and private credit growth show signs of picking up.  Some analysts however believe the forthcoming debenture issues have been ill-timed as the interest rates have now peaked. 
But another section of analysts are of the view that the debenture rush currently seen is an indication of higher medium term interest rates and in view of this, these issuers attempt to lock in the funds now for 3, 5, 7 and 10-year periods. 
Meanwhile, some issuers are raising capital via corporate debt to strengthen their Tier II capital base as the much faster growth seen in loans and receivables during the last two years has made a dent in their Basel II compliant Tier capital. 
These debentures also help assist the issuers to minimize the maturity mismatches in their asset and liability portfolios. 
Among the financial services sector issuers this year were Singer Finance Lanka PLC, which in April raised Rs.1.5 billion via a senior debenture. 

In June Sampath Bank PLC raised Rs. 6.0 billion in subordinated debentures while its fully owned subsidiary, Siyapatha Finance PLC, raised Rs.2.5 billion via senior debentures.  In July Seylan Bank PLC raised Rs.5.0 billion via subordinated debentures and it appears that the bank is again tapping the market for another Rs.8.0 billion in November.