Bond yields decline after US$ 500mn Chinese loan

The secondary market yields of the Sri Lanka issued International Sovereign Bonds (SLISBs) fell soon after the country secured the second tranche of the China Development Bank loan for budget support, propping up its reserves. 

According to the latest data available through April 12, the yields of the SLISBs made an about turn across many maturities on April 12.

For instance, the yield of the US$ 1.0 billion SLISB maturing on July 27, 2021—the nearest maturing bond— fell to around 16 percent on April 12 after rising to 18.55 percent in the week ended in April 09. This bond was issued at a coupon rate of 6.25 percent.  

The bond yields and prices are inversely related. 

Sri Lanka yesterday received US$ 500 million from China Development Bank as the second tranche of a US$ 1.2 billion facility approved by the lender in March last year, as budget support to deal with the economic fallout from the pandemic. 

While Sri Lanka received US$ 500 million as the first tranche, the balance US$ 200 million of the loan is expected to be disbursed when President Gotabaya Rajapaksa makes his planned visit to China. 

 The initial tranche of the loan last year made China the top bilateral lender to Sri Lanka overtaking the longtime bilateral lender Japan. 

The first tranche came at a rate of London Interbank Offered Rate (LIBOR) plus 2.51 percent with an upfront fee of 1.25 percent, with a 10-year tenor including a 3-year grace period. 

The second tranche also comes with a similar tenor. 

Similarly, the other maturities of SLISBs from the next nearest on January 18, 2022 to the furthest on March 28, 2030, saw their secondary market bond yields falling through last week as the Central Bank reassured its commitment to meet all foreign currency debt maturities while government and Central Bank key officials were in the Middle East to seek foreign funds to bolster the country’s reserves. 

Sri Lanka’s foreign exchange reserves slipped to US$ 4.06 billion by March end from US$ 4.58 billion in February end, unsettling investors in both Sri Lanka and abroad. But the receipt of US$ 500 million yesterday is expected to have restored the reserves at February levels. 

Meanwhile, in March Sri Lanka also signed a US$ 1.5 billion swap line with the People’s Bank of China, China’s Central Bank, for 3 years, but authorities haven’t drawn down from this credit line as they keep it as a buffer. 

However, Sri Lanka is en route to reduce its foreign debt component to a third of total public debt or 33 percent of total outstanding government debt in the next couple of years after reducing it to 43 percent in 2020. The government aims to manage debt by reducing its reliance on commercial borrowings by way of ISBs raised continuously since 2007 through 2019.

Out of US$ 3.7 billion in foreign currency debt due in 2021, Sri Lanka has already settled US$ 1.1 billion in January and February and the next big settlement of a billion dollar sovereign bond comes in July.