The government of Sri Lanka returned to the international bond market to price a US$1 billion bond issuance at record low yields in the country’s fifth international US dollar offering since 2007.

 

The 10-year deal was priced at par with a yield of 5.875% or a spread of 437bp over similar-maturity US treasuries. This was lower than the initial guidance of 6.125%, and reflects the improved confidence that international investors have in Sri Lanka’s economy.

 

The transaction offers the lowest yield on record for the sovereign compared to its previous offerings.  The country’s past four issuances including the five-year bond float in 2007 and 2009 as well as the 10-year bond issuances in 2010  and 2011 were  priced  at yields of 8.25%, 7.40%, 6.25% and 6.25% respectively.  The US$500 million bonds issued in 2007 will mature in October this year.

 

The latest offering was launched during Asia morning on July 17 following an investors’ roadshow in Singapore, Hong Kong, London and various cities in the US.  Despite the current volatility in the global capital markets, the transaction received strong investor interest and the order books grew rapidly, with the final order books reaching  US$10.5 billion, or an  oversubscription ratio of 10.5x.  This is the largest order book and generated the highest number of investors ever for Sri Lanka. The deal attracted interest from 425 accounts, higher than the 315 accounts the sovereign received with its last issue in July 2011 when it sold US$1 billion of 10- year bonds.

 

The distribution of the bonds was well diversified, with Asia taking 27%, Europe 29% and the US 44%.  Global funds were the largest investors in the transaction, representing 90%, with banks/private banks and others taking  6% and 4% respectively.

 

The issue is rated B1 with positive outlook by Moody’s; BB- with a stable outlook by Fitch and B+ with stable outlook by Standard and Poor’s. 

 

“The rating incorporates Sri Lanka's favourable growth prospects, which we believe are partly due to the "peace dividend"--or the positive effects of the end of the civil war in 2009,” say analysts at Standard and Poor’s. “We expect investments in the economy to edge upward to 30% of GDP, boosting per capita growth to more than 6% per year in the next few years.”

 

The rating agency however warned that the country is constrained by its weak external liquidity; moderately high and increasing external debt; fundamental fiscal weaknesses and the attendant high public debt and interest burden; and political institutions that, in some cases, lack transparency and independence.  

 

Sri Lanka's external liquidity weakened in 2011 because of the larger current account deficits, equivalent of 7% of GDP. In response, the government and the central bank have recently begun to adjust their monetary and foreign exchange rate policies to curtail the pace of credit expansion and import growth.

 

“The stable outlook on the sovereign credit rating reflects our view that Sri Lanka's strong medium-term growth prospects of more than 6% of GDP per capita and recent measures to improve the fiscal profile are balanced against vulnerable external liquidity and high fiscal and external debt,” Standard and Poor’s says.

 

Bank of America Merrill Lynch, Barclays Capital, Citigroup and HSBC were the joint lead managers and bookrunners on the transaction. Sri Lanka’s People’s Bank acted as the co-manager.