Lanka offers yield on debt higher than Pakistan

The government aims to attract investors to the $500 million sale of 5-year bonds by offering a yield of 8.25 per cent, according to the e-mail. That’s more than bonds from Pakistan.

Sri Lanka is selling debt to build roads and ports to boost growth in the $26 billion economy, which is hampered by high inflation. “Sri Lanka is at the state of economic growth where they need to have this funding avenue open to them,” said Desmond Lum, a Singapore-based senior portfolio manager with Fortis Private Banking, which manages $9.5 billion of assets. “It is important that this very first issue is priced to sell so that investors would be back for its subsequent sales.”

Investors demanded a yield of 8.25 per cent on Pakistan’s 7.125 per cent bonds maturing March 2016, according to Bloomberg prices. Pakistan is rated as B+ by Standard & Poor’s, four levels below investment grade, the same rating given to Sri Lanka.

Consumer prices in the capital Colombo rose 17.3 per cent in August from a year ago, after increasing 17.6 per cent in July, according to K. Sugumaran, statistical officer at the Department of Census & Statistics.

Economic Expansion

The central bank has raised its benchmark interest rate seven times in the past two years to 10.5 per cent, from 8.25 per cent, to battle inflation. Central bank Governor Ajith Nivard Cabraal on Sept. 14 said he expects the economy to expand 7 per cent in 2007, slower than 7.5 per cent that he forecast earlier in the year.

The government wants to use the proceeds from the bond sale to fund projects costing $5 million to $30 million, including power plants, roads and bridges, ports and railway lines, it said in the offer document.

Tourist arrivals fell 15 per cent to 44,742 in August after rebels launched an air attack on oil and gas facilities near the capital Colombo, closing the international airport for flights at night in May and June.

Sri Lanka is promoting its bond sale to investors in Asia, Europe and the U.S. after emerging-market dollar bonds rallied. It hired Barclays Capital, HSBC Holdings Plc and JPMorgan Chase & Co. in August to arrange the sale.

The average yield, or spread, on emerging-market dollar bonds over U.S. Treasuries was at a 21-month high of at 253 basis points on August 16, according to JPMorgan Chase & Co.’s EMBI Plus Index. The spread was 183 basis points on Oct. 15.

Mexico, Venezuela

Central bank Governor Cabraal had planned to sell the bonds as early as last month. He is now pushing ahead after Mexico sold $1 billion of dollar-denominated bonds in September and Venezuela completed a $1.2 billion offering earlier this month.

ICICI Bank Ltd. sold $2 billion of bonds on Sept. 26, with investors applying three times as much as the bonds on offer. Export-Import Bank of Korea sold $1.5 billion worth on bonds on Oct. 10. The bond issue attracted an order of $3.5 billion.

Global sales of new debt rose by 8 per cent to $660.7 billion worldwide last month from August after the U.S. Federal Reserve’s 50 basis point-cut of the benchmark rate for overnight borrowing on Sept. 18 sparked a “recovery rally” in fixed-income securities, according to Lehman Brothers Holdings Inc.’s report on Oct. 8. A basis point is 0.01 per centage point.

“There is certainly a sense of bullishness,” said Dilip Parameswaran, Hong Kong-based head of Asia credit research at Calyon. “Primary markets in US and Europe opened earlier with many investment grade and some high-yield issuers going through. Asia is now following.”