Sri Lanka begins sale of 5-year sovereign bond

Sri Lanka yesterday commenced the sale of her sixth international sovereign bond. International rating agencies Fitch, Standard & Poor’s and Moody’s rated the bond at ‘BB-(EXP)’, ‘B+’ and ‘(P)B1’, respectively, in line with their respective sovereign credit ratings assigned to the country.

The bond is expected to mature in 2019 and, according to Bloomberg the price guidance for the bond was set around 6.25 percent. The news agency further said Citigroup, HSBC, Standard Chartered and UBS were managing the sale.

Though there has not yet been a confirmation about the size of the bond issue, Budget 2014, which was presented a couple of months back, proposed to raise US $ 1.5 billion from international markets.

It was proposed to float a US $ 750 million longterm international bond for the construction of urban and estate housing complexes through the Urban Development Authority, which will be backed by a government guarantee, along with a further US $ 750 million for the government to finance the counterpart funds required for various development projects.

The proposed bonds will constitute direct, unconditional, unsubordinated and unsecured general obligations of the issuer and payments will be backed by the full faith and credit of Sri Lanka.

“The sovereign credit ratings on Sri Lanka take into account the country’s relatively weak external liquidity, moderately high and increasing external debt and a high government debt and interest burden. In addition, some of the country’s political institutions lack extensive checks and balances,” S&P said.

However, if Sri Lanka sustains its recent improvements in external indicators, including a reduction in the current account deficit, these rating constraints could ease, S&P noted.

In July 2013, Moody’s affirmed Sri Lanka’s B1 rating and changed the outlook to stable from positive.

The action was prompted by: 1) the stabilization in the external payments position, following the sizable loss of foreign reserves in 2011 but without enough improvement to support a positive rating action and 2) the pause in significant reduction in the government’s very high debt burden.

Credit challenges for Sri Lanka largely lie in Moody’s assessment of fiscal strength. This  reflects the government’s large debt burden, almost twice as high as B and Caa-rated peers and heavy debt service requirements in relation to both gross domestic product (GDP) and government revenues.

“Although fiscal reforms and improved public-sector enterprise financial performance have started to gain traction, budget deficits remain relatively high and revenue mobilization weak. Therefore, the path of fiscal consolidation and debt reduction will likely be gradual,” Moody’s noted.

“In addition, Sri Lanka has historically had relatively high inflation compared with peers, although inflation has recently moderated to the mid-single digit range where it is likely to remain in the near term,” the rating agency added.