SL recalibrates borrowing strategy towards ISBs

• CB yet to announce how much to be raised through ISBs
• Cabinet approval already given to raise US $ 2bn through ISBs, Panda and Samurai bonds
• CB Governor says ISBs more beneficial as they help debt restructuring due to 5-10 year maturity period
• People’s Bank of China offers US $ 1.5bn 3-year swap deal in Yuan

By Nishel Fernando 

Sri Lanka has recalibrated its borrowing strategy back to dollar denominated international sovereign bonds (ISBs) with the country’s yield curve normalising to below pre-political crisis level.

“The yields have come down and they are slightly lower than they were on October 26, last year. Hence, we have recalibrated our strategy and given priority to going for ISBs first and then based on how much money we can raise at a reasonable cost, we will see what other borrowings we can undertake to meet the financing gap that remains,” Central Bank Governor Dr.Indrajit Coomaraswamy told reporters in Colombo last week.

He noted that Central Bank prefers to raise funds through 5-10 year tenure dollar denominated ISBs, which might be in multiple tranches. 

However, he didn’t reveal how much the government is planning to raise through ISBs. 

“We cannot discuss ISBs explicitly at the moment, because we are in radio silence mode; but we will get a reasonable amount of money at reasonable cost.”

According to the Central Bank, the yields on Sri Lanka’s dollar denominated ISBs spiked sharply by 400-500 basis points after the political crisis in October last year. 

As of last week, the yields have come down to below pre-crisis level due to greater stability in the political front and also due to the settlement of US $1 billion ISB that matured in mid January. 

Dr. Coomaraswamy pointed out that ISBs are more beneficial to Sri Lanka as they assist the debt restructuring process,  given the 5-10 year maturity period. 

“The advantage of ISBs is the maturity. Some people have even shown interest in 30-year ISB issuances. But I don’t know how realistic it is to go for a 30-year tranche, because of the rates,” he added. 

In addition, the government has also repaid other bilateral loans to the tune of approximately US $600 million.

An US $ one billion debt repayment is due within the first quarter followed by US $500 million ISB settlement in April. 

At large, Sri Lanka faces the highest ever debt servicing this year amounting to record $5.9 billion including the maturing of Sri Lanka Development Bonds, which are expected to be rolled over. 

The Central Bank earlier had planned to raise over US $5 billion within the first quarter of this year in dollar denominated ISBs, Panda and Samurai bonds, various term loans and through several swap deals. 

Dr.Coomaraswamy insisted that this option would remain as “stand by” to address any requirement that might arise later on.  The Cabinet approval has already been granted to raise US $2 billion through ISBs, Panda and Samuri bonds. 

The Central Bank has shortlisted lead managers to manage these bond sales.

Dr.Coomaraswamy said he expects the process to sell Panda and Samuri bonds to take a longer period as this would be the first time Sri Lanka is issuing such bonds. 

However, he stressed that the government plans to raise all the money as quickly as possible. 

Meanwhile, he revealed that the People’s Bank of China had offered a US$1.5 billion three-year swap deal in Yuan while the Central Bank of Qatar also had sent a draft agreement for a swap in Riyal. 

“As those swaps are in Yuan and Riyal, it is more expensive, if there is a need to convert. But it’s very useful to have them as standby, if there is a problem. Hence, we are working on those,” he added.  

The Central Bank expects to complete a US$ 400 million swap with Reserve Bank of India (RBI) within a week or so. 

The Governor noted that legal and administrative processes are currently underway in this regard, including the getting of Cabinet approval and AG’s clearance. 

Speaking of earlier announced US $300 million term loan with Bank of China, he said that the government is continuing negotiations with the bank.

He revealed that the tenure of the loan is to be limited for one year. Hence, he hinted that upsizing of the loan facility to US $1 billion might not be wise, though Bank of China had indicated they are willing to consider the option. 

“Whether we want to do that is not clear,” he said. 

Despite the announced plans, the government has failed to raise any significant funds for debt servicing so far this year. 

As a result, the gross official reserves have come down to US$ 6.2 billion at the end of January as the government utilised reserves for debt repayments in January. 

However, the Central Bank stressed that the government will go to international capital markets shortly to raise necessary funds within this quarter.