Nearly two-thirds of SLDBs unsold; fresh concerns raised on appetite for such bonds

Sri Lanka failed to sell nearly two-thirds of Sri Lanka Development Bonds (SLDBs) offered at the auction held last week to rollover similar styled bonds worth US$ 178.57 million despite claims that these bonds consistently see active demand from banks and other financial services sector entities. 

The Central Bank offered SLDBs worth of US$ 100 million in four tenors from the lowest of 10 months to the highest of 3 years and 7 months at an auction held from June 21 through June 25 at fixed interest rates. 

At the time of the announcement of the offer, the Central Bank was expecting to upsize the offer by another US$ 80 million in the event of an oversubscription of the initial US$ 100 million tranche. 

But the offer attracted bids worth only US$ 35.53 million while the Central Bank accepted bids worth only US$ 34.8 million during the four-day window, as June 24 was a holiday. 
Despite the subscriptions falling well short of the offered amount, the books remain open for additional bids should they arrive. 
If the Central Bank fails to sell the balance two thirds of bonds via subscriptions, 

they could either resort to private placements of the bonds as they did in April or else they will have to make up for the balance US$ 144 million from the foreign currency reserves, which declined to US$ 4.0 billion at end-May, which is barely sufficient to cover three months of imports. 

There were concerns as of late whether the SLDBs had lost their shine as they repeatedly failed to attract bids to make up for the total offered amount this year. 

A January offer of US$ 200 million SLDBs attracted bids worth of only US$ 62.64 million, and the Central Bank accepted only US$ 43.6 million.

In the one before the last week’s issuance, the Central Bank offered US$ 750 million in SLDBs in an auction held from April 22 to April 28 but attracted bids worth of US$ 660 million, and accepted US$ 652.63 million. 

The Central Bank then issued US$ 42 million via a private placement bringing the total amount accepted to US$ 694.63 million as they sought to retire bonds worth the same amount on May 1. 

The Central Bank in May dispelled concerns of weak subscription received for SLDBs and said they see the general demand for the bonds from market participants, particularly banks and other financial institutions.  

“With respect to SLDBs, we are seeing a continues general demand from market participants, particularly from the domestic banking and finance sector and also from other foreign currency earnings entities,” said Dr. M.Z.M. Aazim, Superintendent and Registrar at Central Bank’s Public Debt Department.

However Fitch Ratings in a special report on Sri Lanka’s banking sector’s foreign currency and liquidity risks said they observed the banks’ subscriptions in SLDBs had been less than the Sri Lanka-issued International Sovereign Bonds (SLISBs) due to the latter’s relatively higher yields. 

The Central Bank on June 16 gave leeway for banks to invest in the SLISBs, ending the six-month long suspension provided such funds are raised through fresh borrowings. 

Further, any investment must be made in the dollar bonds in equal proportions between the SLDBs and the SLISBs in a possible tactic to draw more funds into the SLDBs.

However, with the April SLDB issuance, Sri Lanka had managed to rollover nearly two thirds or US$ 800 million worth development bonds out of a total US$ 1.3 billion due in 2021.