Sri Lanka overcomes political risks to price largest bond deal ever

Sri Lanka prices dual-tranche offering totaling US$2.50 billion at five and 10 years

THE Democratic Socialist Republic of Sri Lanka overcame some recent political risks in tapping the US dollar bond market, pricing on April 11 a dual-tranche offering totaling US$2.50 billion. This is the largest fundraising ever by the sovereign in the offshore debt market since its inaugural transaction in 2007 when it printed a US$500 million issue.

The Reg S/144A deal is equally split at US$1.25 billion each with the five-year tranche priced at par with a similar coupon and re-offer yield of 5.75%. This was in line with the final price guidance and 25bp tighter than the initial guidance of 6% area.

The second tranche is for 10 years and also priced at par with a similar coupon and re-offer yield of 6.75%. This was likewise in line with the final price guidance and 25bp inside the initial range of 7% area.

Both tranches performed in the secondary market with the five-year bonds quoted at 100.40% and the 10-year at 100.65% before lunch on April 12.

The deal was successfully executed despite the recent rising political risks in the country, including the no-confidence motion against Prime Minister Ranil Wickremesinghe, which he survived, and the communal violence in the central hill district of Kandy.

“Sri Lanka is a well-established borrower that has accessed the bond market consistently for a number of years now and during that time they’ve managed to build a very strong following among the global investors,” says a banker familiar with the deal. “The strength of that investor following and the sovereign’s credibility in the market has helped see them through such a challenging period.”

In terms of relative value, the banker reckons Sri Lanka paid minimal new issue premium of about 25bp for the five years and 15bp for the 10 years in the context of the current market environment – though the five-year premium is probably closer to 15bp as well as the outstanding 2022 bonds are quite an old comparable. This was in line with what Saudi Arabia, which is a much better rated credit, paid for their transaction the day before, the banker notes.

The offering garnered a combined order book of US$6.5 billion from 425 accounts with the five-year attracting a total demand of US$3 billion from over 235 investors. In terms of geographic distribution, 66% of the bonds are distributed in the US, 24% in Europe and 10% in Asia. By type of investors, fund managers accounted for the bulk of the paper at 92%, while pension funds and insurance companies took 5%, banks 2% and private banks 1%.

The 10-year bonds generated an order book of US$3.5 billion from 190 accounts with 65% sold in the US, 29% in Europe and 6% in Asia. Fund managers were also the biggest buyers with 92%, while the remaining 5% was taken by pension funds and insurance companies, 2% by banks and 1% by private banks.

The large US investor participation in the latest bond deal was in line with their previous responses to the Sri Lankan sovereign offerings. In its May 2017 issuance for US$1.5 billion, 58% of the bonds were distributed in the US.

“This is a great outcome for Sri Lanka and should help pave the way for its future exercise in the debt market particularly with the passing of the liability management act,” the banker adds. This act is designed to improve the country’s public debt management, enabling the government to raise more money than what is needed to plug the budget deficit to help fund debt repayments.

Citi, Deutsche Bank, HSBC, J.P. Morgan and Standard Chartered acted as the joint bookrunners for the transaction.

Sri Lanka’s previous largest fund raising in the offshore debt market in a single year was in 2015 when it raised a total of US$2.15 billion in two transactions – US$650 million in May and US$1.50 billion in October, both for 10 years.

Date

12 Apr 2018

Channel

Capital Markets

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