Some banks have limited appetite for ISBs despite revocation of suspension: Fitch

Although the Central Bank lifted its six-month long restriction on purchasing Sri Lanka issued International Sovereign Bonds (ISBs) in mid June, some banks will have only limited appetite to invest their dollar denominated funds in them, according to Fitch Ratings. 

The banks however prefer ISBs over Sri Lanka Development Bonds (SLDBs) due to the higher yield offered by the former, but their exposure to Sri Lanka’s sovereign and particularly to the foreign currency denominated bonds at a time when the government is facing increased foreign currency liquidity risks could make the ISBs less attractive. 

The banks in 2020 provided huge impairments against their holdings of ISBs in the wake of Fitch downgrading the Sri Lankan sovereign to ‘CCC’— the junk category— in November. 

Adding more holdings into their balance sheets could also result in weakening banks’ capital ratios should such bonds lose in value, as there is a capital charge if the risk of holding such bonds increases. 

“We believe some banks are likely to have limited appetite for increased exposure, notwithstanding the above,” Fitch Ratings said in reference to the revocation of the suspension on banks from buying ISBs. 

The Central Bank said banks could purchase ISBs provided they raised fresh foreign exchange from borrowings, but investments should be made in SLDBs and ISBs in equal proportions, as the interests in SLDBs as of late waned considerably.  

Commercial banks account for the majority of the SLDBs, while Fitch-rated Sri Lankan banks hold 15.5 percent of the face value of ISBs issued, though they are concentrated mostly among the large private banks. 

There is a bunching up of SLDB and ISB maturities during 2021 and 2022, exerting more pressure on foreign currency liquidity of the Sri Lankan sovereign. 

Sri Lanka is set to settle a billion dollar ISB on July 27, and its secondary market yield further rose to 31.73 percent from 25.28 percent in the previous week due to investor concerns. But the Central Bank and the government reassured of maintaining Sri Lanka’s immaculate track record in meeting foreign currency debt obligations as they fall due.