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Sri Lanka begins international junk bond roadshow

Barclays Capital, HSBC and JP Morgan, which are lead managers to Sri Lanka’s maiden 500-million-dollar 10-year junk-rated bond issue, said in a joint statement they had begun marketing the debt in Europe, Asia and North America.

The investment houses did not say where the roadshows would start but Sri Lanka’s central bank said they would be staged in Singapore, Hong Kong, London and North America.

The announcement of the roadshow came as international credit rating agency Fitch Ratings warned that if the ethnic conflict racking the tropical island grew more severe it could “affect Sri Lanka’s credit fundamentals” and “lead to a downgrade.”

More than 5,400 people have died since December 2005 when a Norwegian-backed 2002 truce began to unravel.

The bond issue carries a “junk bond” or below investment grade rating of BB minus from Fitch Ratings, which also warned the government to lower inflation and contain lavish spending plans.

Sri Lanka’s inflation is running at 17.3 per cent, public debt is at a hefty 93 per cent of gross domestic product and interest payments absorb almost a third of government revenues, Fitch said.

“Steering inflation back down to a single digit will be essential for sustaining strong economic growth and containing the government’s debt service costs,” the agency said.

But on a positive note, despite the more than three-decade-old conflict, Sri Lanka’s economy has shown “remarkable resilience” and the nation has an unblemished debt service record, a rare trait among sub-investment grade sovereigns,” noted Fitch.

The island’s 26-billion dollar economy is on track to record 7.5 per cent growth this year, the fastest since 1978 when it grew by 8.2 per cent, economists say.

The strong growth is being driven by a booming services sector, led by telecommunications.

The rapid GDP growth comes despite the escalating clashes between troops and Tamil rebels who are fighting for a separate homeland.

Sri Lanka’s main opposition, the United National Party (UNP), wrote to the lead managers last month warning that the debt might be illegal because parliament had not approved its issuing.

It said that a future UNP government might not honour repayments.

However, the finance ministry said the bond sale was legal and had been approved in the budget passed last December. Fitch said it did not expect a future UNP administration to default on payments. Fitch Ratings gave Sri Lanka a negative outlook in 2006 because of the violence, meaning it is more inclined to reduce the credit ranking. Borrowing costs have surged. The yield on the government 7.6 per cent local-currency bond due in August 2009 climbed to 16.2 per cent from 11.469 percent a year ago, according to data compiled by Bloomberg.

By contrast, similar-maturity bonds from Turkey, the Philippines, Uruguay and Venezuela with the same BB- debt ranking from Fitch Ratings all have yields that are less than half Sri Lanka’s. Of the four, Veneuzuela’s rate of 7.56 per cent is the highest.

Fitch’s BB- ranking on the new bond is three levels below investment grade. Standard & Poor’s has a B+ rating for the nation’s long-term foreign-currency bonds, four levels below investment grade, with a stable outlook.

The debt sale will also serve as a benchmark for Sri Lankan companies raising money in international capital markets, the central bank said on July 13. Sri Lanka Telecom Ltd., the nation’s biggest telephone company, raised $100 million in November 2004 in the first overseas debt offering by a company from the South Asian island.