Listed Firms in CSE Issue Debentures to Raise Big Sums Following Budget 2013 Concessions on Corporate Debt

27th March 2013, www.dailymirror.lk

Many listed entities in the Colombo Stock Exchange were seen taking advantage of the concessions offered in the Budget 2013 with regard to corporate debt, as few companies have already raised big sums this year through debenture issues with a several more to follow.

On Monday, Fitch Ratings said Lion Brewery, a unit of Carson group and Softlogic Holdings were planning to Rs.3 billion and Rs.750 million respectively through debenture issues. The two issues have been assigned AA- and A-, respectively, by Fitch.

The Budget 2013 proposed to exempt withholding tax on interest income earned by investing in bonds and debentures listed in the Colombo Stock Exchange (CSE) with effect from this year in an attempt to create a more vibrant corporate debt market.

Being the first to take advantage of the new development, Seylan Bank PLC finished raising Rs.2 billion via a debenture issue in February that was oversubscribed in the opening day itself.

Merchant Bank of Sri Lanka, a unit of state owned banking giant, Bank of Ceylon also raised Rs.2 billion through a listed debenture.

According to analysts, companies seem to be using this window of opportunity to raise long-term capital, as the tax concessions offered in the Budget 2013 are applicable for the entire duration of the debt.

“So they can lock the moneys raised and keep it for future needs,” an analyst pointed out.

“It is encouraging to note that better managed companies are using the capital markets to raise debt on the strength of their own balance sheet.

This will reduce exposure to bank borrowings and raise medium to long-term capital, reducing interest rate risk. We hope more companies will take advantage of the tax break to issue rated longterm paper,” Fitch Rating Lanka said, responding to a Mirror Business inquiry.

According to market sources, a number of companies, including couple of big banks and several finance companies are also bracing to raise money via debenture issues in the near future.

Meanwhile Mirror Business learns that Colombo Stock Exchange is currently in the process of amending certain Listing Rules pertaining to the listing of debentures both in the main and the secondary boards.

Surplus Dollars Can be Channelled into Sri Lanka Corporate Bond Market

11th April 2011, www.dailynews.lk, By Ramani Kangaraarachchi

A vibrant corporate bond market is vital to the stability of the Sri Lankan economy because it will enable top corporates to borrow at low rates and invest in sustainable, long-term projects, thus meeting the desired growth potential of the nation.

Speaking to the Daily News Business, The Finance Company Chairman and Ram Rating (Lanka) Ltd. Director, Preethi Jayawardena said that prolonged fears over investment will continue, unless a secondary bond market is developed to encourage and invite investors.

The positive steps taken by the regulators will assist in developing such a secondary market, he assured.

In most developing countries one third of private sector investments are funded by corporate bonds, another one third by equity and the remainder through bank borrowings. With relaxed exchange control rules being implemented by the Central Bank of Sri Lanka, corporates are at an advantage in receiving funding from the bond market at very lucrative rates.

Jayawardena said that corporates should apply for ratings from one of the recognized rating agencies in the country.

If the rating received is of investment grade then they could easily borrow in USD or any other recognized currency and build on the investment for a durable period of 5-25 years.

Elaborating on the US market he said that the quantitative easing which is currently taking place in that part of the world, stimulates billions of dollars being pumped into the market.

These surplus dollars could be easily channelled into our country, offering a slightly higher interest rate. Today the US interest rate stands at 0.25 percent.

According to the MD of S&P Singapore, when a country opens its door to the corporate bond market for the first time, there will always be a gestation period of two-three years until the corporate bond market stabilizes.

Jayawardena also stated that the country’s last annual budget of 2010/2011 catered to bringing down the fiscal deficit by the year end. The steady progress of the IMF facility and the satisfactory implementation of monetary and fiscal policies have stimulated the positive and proactive manner in which the country’s economy is being administered.

He emphasized that the last annual budget kept the public sector investment at the same percentage as the previous year’s 2.8 percent of GDP, in order to cater strictly the preservation of infrastructure development of the country, primarily improving road development and building bridges, airports and highways.

The boosting of the private sector investment was also expected, given the desire to keep up with the desired growth rate of 8 percent. In view of this, the policy makers reduced the corporate tax from 35 percent to 28 percent and reduced the exposure to deem dividend tax from 25 to 10 percent of the total profits of the company. These measures were taken solely to provide corporates with the opportunity to have sufficient funding for long-term investment he said.

Jayawardena insisted that today Malaysia boasts of a corporate bond market of the value of US $ 89 billion, which is the third largest in Asia and Sri Lanka also should not take long to build the corporate bond market to somewhat closer proportions.

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Sri Lanka Needs to Develop Corporate Bond Market as Investors Eye Asian Instruments due to US Quantitative Easing

29th March 2011, www.island.lk

Sri Lanka needs to develop its corporate debt securities market in order to attract investments as the banking sector is not in a position to finance long term projects that are required for the post-conflict economy to realise its growth potential. John Keells Holdings President, Head of Corporate Finance and Strategy, Krishan Balendra said foreign investor appetite for rupee denominated bonds was healthy with the conglomerate receiving many inquiries.

"There is strong investor appetite for long term rupee securities and it is an excellent opportunity to develop the corporate bond market in Sri Lanka," Balendra said addressing the CMA Business Forum in Colombo yesterday (29). The forum was organised by the Institute of Certified Management of Sri Lanka together with RAM Ratings Lanka Private Ltd and its global partner Standard and Poor’s.

Sri Lanka has an active government bond market and the government in its recent budget paved the way for Sri Lanka’s corporate sector to issue bonds to foreign investors by relaxing exchange controls in this regard.

"Hopefully, the private sector can follow the government’s success," Balendra said adding that it would be a good thing for the government to issue a sovereign bond denominated in rupees.

For the corporate bond market to be a success, the government would have to issue bonds on longer tenures ranging from 10 to 15 years which are actively traded on the secondary market.

So far, the government has had three sovereign bond issues denominated in dollars totalling US$ 2 billion, most of which were snapped up by US based investment houses.

Foreign investors eye local currency bonds

Managing Director Standard and Poor’s Singapore Surinder D. Kathpalia said quantitative easing in the US (printing money to stimulate its struggling economy) resulted in investors looking at emerging economies where returns were relatively better.

He said foreign investors were interested in investing in local denominated bonds, resulting in the ‘internationalisation’ of local currency markets, particularly in Malaysia, Thailand, Japan and Hong Kong.

"Investors are primarily attracted by the liquidity levels in these markets, their attractive pricing and funding needs of the countries themselves. Global investors are increasingly holding local currency bonds (as against dollar denominated), driven by higher bond yields, potential currency appreciation and strong growth prospects.

In these Asian economies, banks financed around 1/3 of total investments along with equity which was also around 1/3 while bonds financed half of all investments in these economies.

"Perhaps the lesson for Sri Lanka is that it could try to deepen its bond market and allow cross-border bond issues," Kathpalia said adding that in Sri Lanka, banks financed a little more than half the investments while the equities market financed the balance, eluding to the fact that Sri Lanka had potential to develop the corporate bonds market as a cheaper sourced of financing compared to bank borrowings.

However, he cautioned that Sri Lanka would not be able to develop a vibrant bond corporate bonds market overnight.

The Securities and Exchange Commission has been trying to develop the corporate bonds market for some time, but absence of longer tenures in government bonds made it difficult to develop a yield curve that would make it possible to price private sector bonds.

Banks cannot do the job

Chairman Chemanex PLC Preethi Jayawardena, a member of the Central Bank Monetary Board Consultative Committee, said raising finances through a corporate bond issue would be cheaper than borrowing from the banking system.

"There is also a mismatch because banks prefer lending on the short to medium term, but large development projects require long term loans. Corporate bonds do not have this problem as the tenure would match the project."

Jayawardena criticised the banking sector saying that if policy rates were increased by half a percent banks would increase lending rates by 2 percent, a problem eliminated by sourcing funds through a corporate bond issue.

The corporate bond market must be developed immediately if the private sector is to find the finances to invest in the economy on a long term capacity, and fulfil its role as drivers of the economy, he pointed out.

In order to maintain economic growth at 8 percent in the medium to long term, a gross investment rate of nearly 34 percent of GDP would be required. In the past five years the gross rate of investment has been only 27 percent of GDP, with the government accounting around 6 percent of this.

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