Sri Lanka exploits brief calm to raise $1 billion

Markets have hardly been conducive to new debt issues recently, but Sri Lanka took advantage of a brief calm early yesterday morning to successfully price a $1 billion 10-year global bond.

Sri Lanka is used to dealing with bigger problems than volatile financial markets, and the once war-torn country’s ability to raise such a large amount of money at a competitive yield is testament to just how far it has come since the civil war ended in 2009 — and contrasts sharply with the experience of its embattled European peers.

Bank of America Merrill Lynch, Barclays Capital, HSBC and Royal Bank of Scotland were joint bookrunners for the deal. Bank of Ceylon acted as a co-manager.

The leads kicked off roadshows on July 11 and decided to push ahead with pricing slightly ahead of schedule as they saw a window to launch a transaction amid relatively stable markets. They released initial guidance in the area of 6.5% on Wednesday morning ahead of officials wrapping up one-on-one meetings with investors in London later that day.

During midday London time, the leads revised guidance to 6.25% to 6.375%. Momentum for the transaction continued to build and the order book reached more than $5 billion before the US opened. The bonds eventually priced at the tight end of that final guidance, offering a spread of 332.2bp over US Treasuries.

While it was on the road, Sri Lanka also received a vote of confidence from the rating agencies. Fitch upgraded its rating on Sri Lanka to BB- from B+ on July 18, citing the country’s stabilisation and economic recovery under the IMF programme, as well as its efforts to address its budget deficit. Moody’s and S&P both revised their outlooks on Sri Lanka to positive but kept their ratings at B1 and B+ respectively.

“Sri Lanka has come a long way,” said one person familiar with the deal. “We are getting bad news out of Europe on an almost daily basis, so we were pleasantly surprised when the deal was done at a coupon of 6.25%,” he added.

The deal appealed to the US emerging market and global funds, which saw rarity value in the deal. Sri Lanka tapped the market just 10 months ago, but has fewer outstanding bonds than Indonesia and the Philippines.

The final book stood at $7.5 billion, with orders from 315 accounts. US investors were allocated 43%, Europe was allocated 30% and Asia 27%. Fund managers were allocated the biggest share with 86%, banks/private banks were allocated 8%, corporates 3% and insurers 3%.

The rush of fund flows from the US into emerging market sovereigns — which started in 2009 and accelerated last year — has tapered off slightly this year as investors have turned defensive. However, Sri Lanka has shown that there is still ample demand in the US for the right credit.

Malaysia’s $2 billion sukuk global bond, in contrast, attracted a more muted response from US investors, who were allocated just 4% of the five-year tranche and 15% of the 10-year tranche.

Sri Lanka’s bonds traded at 101.5 in the secondary market yesterday morning, rising 1.5 points from the par issue price.

The deal is Sri Lanka’s second 10-year issue. The sovereign priced its debut $1 billion 10-year global bond in September last year via arrangers Bank of America Merrill Lynch, HSBC and Royal Bank of Scotland. That deal paid a similar coupon of 6.25% but offered a higher spread of 373.1bp over Treasuries. As a spread over Treasuries, Sri Lanka paid roughly 40bp less in its latest deal.

According to one person familiar with the deal, the Sri Lanka bonds maturing October 2020 were trading at a yield of 6.1% while the new bonds were being marketed. Taking into account the US Treasury yield curve, the nine-month extension was worth about 14bp. This put the theoretical value of the new 10-year bond maturing July 21, 2021 at about 6.24%, which meant that the new bonds came with hardly any new issue premium. Following the pricing of the deal, the existing Sri Lanka October 2020s rallied and were quoted at 102.5 and a yield of 5.9%.