Sri Lanka sells record US$2.5bn in 5, 10-year sovereign bonds
ECONOMYNEXT – Sri Lanka has sold 2.5 billion US dollars from sovereign bonds selling 5-yaer bonds at 5.75 percent and 10-year bonds at 6.75 percent, at a time when new issue premiums were high in the market.
Bloomberg Newswires said Sri Lanka raised 1.25 billion dollars in 5-year bonds and 1.25 billion US dollars in 10-year bonds.
Sri Lanka is raising money partly to early-settle so-called ‘bunched up’ debt.
Sri Lanka went to the market at a time when so-called ‘new issue premium’ or the extra yield investors demand from new issues over existing bonds had suddenly widened to over 30 – 40 basis points from around 10 basis points, international capital market specialists said.
Sri Lanka has a below investment grade rating of B+ from Fitch.
"A dollar bond is priced based primarily on three factors," a bond market investor said. "It is based on the US Treasuries rate and the risk premium, which you can see in existing bonds and also the new issue premium."
Bond yields bottomed out around September 2017 and markets have volatility in 2017 as Fed hiked rates and also global political uncertainty.
New issue premiums had suddenly widened over the past several weeks as investors demanded a higher yield for new debt, making some issuers hold back. However the Fed is expected to hike rates three or more times this year.
Sri Lanka sold the 10-year bond at 6.75 percent, about 18 basis points higher than an existing 2027 bond which now has a shorter tenure of about 9 years, indicating narrow or no new issue premium. Sri Lanka recently passed a new tax law to boost revenues and has been narrowing budget deficits giving a boost to investor confidence.
Sri Lanka sold 2027 bonds in May 2017 when US Treasuries were about 2.35 percent indicating a risk premium of about 385 basis points. US Treasuries are now about 2.79 percent indicating a total risk premium including the ‘new issue premium’ of about 3.96 percent.
The 5-year bond was priced at 5.75 percent was close to 50 basis points higher than a 4-year existing bond which was trading around 5.28 percent in recent days.
The sale is managed by Citibank, Deutsche Bank, HSBC, JPMorgan and Standard Chartered. (Colombo/Mar12/2018 – Updated)