CB hopes to issue international bonds in rupees

Corporate bond market to grow ten-fold to Rs. 1 trillion by 2016

* To minimize exchange loss by capitalising on growing confidence in the local currency

Central Bank Governor Ajith Nivard Cabraal says the corporate bonds market would grow 10-fold to Rs. 1 trillion while the country would be in a position to offer international bonds denominated in rupees.

Featured in Euroweek (December 2012 issue, published by Euromoney Institutional Investor PLC) the governor said an initiative under consideration at the Central Bank was the issuance of internationally-targeted Sri Lankan rupee-denominated bonds.

"We have already seen growing confidence in the currency among some big international investors, which means that in the near future we may be able to issue international bonds in rupees, which would minimise our exposure to exchange rate movements," Cabraal said.

The Sri Lankan central bank has high hopes for the domestic capital markets, projecting that the volume of corporate bonds outstanding will increase ten-fold, to Rs1,000 billion, by 2016, Euroweek reported.

Excerpts of the report:

A key challenge that the Sri Lankan government is eager to address is the underdevelopment of the domestic capital market, which was identified as a credit challenge by Moody’s in its most recent analysis.

Central Bank of Sri Lanka governor, Ajith Nivard Cabraal, acknowledges that this is a weakness that needs to be addressed if Sri Lanka is to deliver on its potential. "The domestic capital market certainly has potential, but is an area where we have been lagging behind, especially in the corporate bond market," he says.

The Bank has thrown down a gauntlet to the domestic corporate sector in projecting that the volume of corporate bonds outstanding will post a 10-fold increase, from Rs. 100 billion to Rs1,000 billion, by 2016.

Nick Nicolaou, chief executive of HSBC Sri Lanka and Maldives, points to at least four reasons why a growth of this magnitude may be within reach. First, there is a very high demand for funding within the corporate sector, given the number of investment plans that have been given the green light since the end of the civil war.

"There is a clear need for additional funding in Sri Lanka and equity alone won’t be able to satisfy this demand, so there is certainly a need for a deeper corporate debt market," says Sumith Perera, fund manager at Guardian Fund Management in Colombo.

Its emphasis to date has been on equity investment, but Perera says that he expects the expansion of the local bond market to create more opportunities for fixed income investment in Sri Lanka over the next few years.

Second, the anti-inflationary restrictions that have been put on bank lending are expected to lead corporates to explore alternative funding sources.

"Increasingly, the banks have been encouraging their corporate clients to go to the bond market and develop their own investor bases," says Cabraal.

Third, adds Cabraal, although the corporate bond market has been slow to gather traction, there is a well developed fixed income culture in Sri Lanka. "We enjoy the advantage of having a strong, transparent and liquid government debt market," he says.

Fourth, while yields in the government debt market remain attractive, they have been falling in recent years. The overall average yield in the T-bill market fell from 18.59% in 2008 to 7.77% at the end of 2011, according to the government’s latest public debt market review, while in the

T-bond market the yield declined over the same period from 18.59% to 8.64%. "There is likely to be plenty of demand among insurance companies, provident funds and other institutional investors for higher yielding corporate bonds," says HSBC’s Nicolaou.

International issuance is also expected to gather pace, now that the government has established an increasingly liquid yield curve in the dollar market and has emphasized a demonstrable commitment to the market, having issued in public benchmark format almost each year since 2007.

"We have given a clear indication to international markets that we are committed to regular issuance," says Cabraal. "One of the reasons why our bonds have tightened so sharply is that we have been able to build confidence among investors through an interactive dialogue. This is a process which has brought a very important discipline to our debt management, because we are now evaluated by international investors who benchmark us against other sovereign borrowers."

Cabraal says that competitors in the international capital market include borrowers such as the Philippines, which have longer track records than Sri Lanka.

"Sri Lanka’s success in the international bond market not only reflects its robust and improving credit story," says Alexi Chan, managing director and head of Asian debt capital markets origination at HSBC. "It is also a credit to the continuous efforts of the central bank and ministry of finance teams in engaging with international investors to keep them regularly updated on the latest developments in the country."

Aside from continuing to build a yield curve in the international market, another initiative that is under consideration at the central bank is the issuance of internationally-targeted Sri Lankan rupee-denominated bonds. "We have already seen growing confidence in the currency among some big international investors, which means that in the near future we may be able to issue international bonds in rupees, which would minimise our exposure to exchange rate movements," says Cabraal.

source - www.island.lk