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Sri Lanka in $500 mln, 5-yr bond sale

[Reuters, Thursday, 15 October 2009 08:26 No Comment]

Sri Lanka is opening orders for only its second global bond ever, aiming to raise $500 million after investor sentiment towards the South Asian country improved sharply with the end of a 25-year civil war.

The country, which debuted in the international bond market in 2007, is selling dollar bonds due in January 2015 in an offering handled by JPMorgan, HSBC and The Royal Bank of Scotland.

"The central bank has launched the sovereign bond today. An official announcement will follow soon," a senior central bank official in Colombo told Reuters on condition of anonymity.

Another senior central bank official and a banker at one of the lead managing banks also confirmed the launch.

A Hong Kong-based source close to the deal said the transaction was likely to be executed this week and price guidance could be announced later on Wednesday.

Sri Lanka has indicated it would like to pay 7 percent for the bond, but investors are expected to demand a higher yield to compensate for the additional risk of buying from a lesser known emerging market issuer.

Yang-Myung Hong, a Hong Kong-based credit analyst at Nomura International, said a yield of around 8 percent being suggested by some market sources is a fair level.

"This is considering that Indonesia and Philippine sovereign bonds with 5-year maturity are in the mid-4 percent yield area and slightly longer-dated Pakistan in the 9 percent range," he said.

"The strength in the overall credit markets and positive expectations on the sovereign post the end of the civil war should provide support to this new issuance," he said.

ATTRACTIVE POST-WAR

Sri Lanka has seen its investment attractiveness grow since it defeated the Tamil Tiger rebels in May and secured a $2.6 billion International Monetary Fund loan in July.

Encouraged by the end of the civil war, Sri Lanka’s stock market <.CSE> has returned over 108 percent so far this year — the second-best performing bourse in the world after Peru <.IGRA> — while tourist arrivals have surged 25.2 percent since May.

Sri Lanka plans to use the bond’s proceeds to pay off existing treasury securities sold at higher yields in the past to fund infrastructure projects, the central bank has said.

Under the IMF agreement, Sri Lanka this year can borrow no more than $500 million externally.

On Wednesday, ratings agency Standard & Poor’s gave the proposed bond offering its ‘B’ senior unsecured debt rating, citing the expected peace dividend and favorable economic growth prospects. But it added Sri Lanka’s ratings were constrained by perennially large fiscal deficits and its resultant high level of public debt. [ID:nWLA5606]

In August, S&P raised its outlook on the country’s B rating to stable from negative, while rival Fitch followed this week with a similar change in outlook for its B-plus rating. [ID:nWNA5646]

The country’s first $500 million, five-year bond <LK032736246=> is yielding about 7 percent compared to a high of 25 percent late last year when the central bank was struggling to rein in soaring inflation.

Yields have fallen steadily since the conflict with the separatist rebels ended in May, and the central bank has pushed its policy rates lower to encourage lower market lending rates.

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