Issuer: Democratic Socialist Republic of Sri Lanka
Amount: $50 million floating-rate note
Launched: 13 March 1997
Lead manager: Citibank & ING Barings
What makes a deal successful? For Sri Lanka it might simply be that one was possible. Think of the country, and you think of the Tamil Tigers and the war they have been waging against the government for the last 15 years. Sri Lanka’s last issue was in 1982, you would hardly expect it to tap the international capital markets now it doesn’t even have a rating. But in mid-March, Citibank, which initially won sole mandate, and ING Barings acted as joint book runners for a $50 million floating-rate note (FRN).
And the deal achieved a good price. At a spread over three-month Libor of 150 basis points at par, the government got a price equivalent to a good BB/BB+ rated issuer. This also compares favourably with the 175bp over six-month Libor achieved by Bank of Ceylon for its $12 million FRN issued in September last year. Also, the issue went ahead despite the general widening of spreads for emerging market issuers since mid-February. “We had a large book before we went into the deal which shrank as investors became concerned at the spread situation,” says Manuel Carralet, head of debt syndication at ING Barings. “But the deal was still oversubscribed on the day.” To make the paper more attractive to investors, the issue was given a three-year maturity with a put at two years. An official at Citibank explains the structure: “Previous Sri Lankan paper, such as for Bank of Ceylon, rarely went beyond two years. So the government, with its first issue in 15 years, had to go at or beyond that maturity. Although there is a puttable option after two years, we don’t expect investors to exercise it the FRN would effectively be very favourably priced one-year paper by that point.”
Surprising though the issue was to some, it was an option Sri Lanka had been contemplating for some time. “We’d been looking to come to the market for two-and-a-half years,” says Amaranada Jayawardena, governor of the Central Bank of Sri Lanka. “And at one point we were planning to issue last year.”
One reason for postponing the deal was a decision about which market instrument to use. Before winning the mandate, Citibank had given a presentation to the central bank in June last year explaining all the options, and initially the preference was for a straightforward syndicated loan. The decision to switch to the FRN was taken after Citi’s corporate finance team had contacted ING Barings about the loan. “We came to the conclusion that the FRN gave the government the opportunity both to fuel the demand from the banks which had shown an interest in the loan, as well as tap new investors,” says Carralet. Choosing the FRN allowed the paper to go farther afield than it might have done with a loan: Swiss and south east Asian investors took 25% each, 20% went to the Gulf, and UK, German and Dutch investors each took 10%.
Banks still made up a significant proportion of investors. Carralet estimates that 20% was split evenly between emerging-market bond funds and pension funds, with the rest going to banks, 25% of which went to private banks. In fact, says a banker close to the deal, at least two syndicate members Korea Exchange Bank and Austria’s GiroCredit Bank wanted to be investors as well as underwriters. “We’ve also taken a significant role as an investor,” says Carralet, although some in the markets believe that’s because the bookrunners couldn’t shift the paper. “I’d lay the blame squarely at the lack of professional distribution,” says one observer
This was not the only ruction concerning the syndicate. The problem was not the issue itself the joint leads ran the deal on a pot basis, enabling them to keep tabs on how many double bookings there were and so have a more exact idea of how much demand there was for the paper. Instead it was in the choice and structure of the top end of the syndicate. Some in the market were surprised that Citibank won the sole mandate. “They’ve not been very active in the Indian subcontinent at all,” said one banker. “So they had to go out and find a joint bookrunner which had some experience of Sri Lanka.” According to one head of origination, Citibank asked both ING Barings and ANZ Grindlays if they wanted to be joint bookrunner, expecting one to turn it down. “But they both said yes, which left Citi in a predicament. You can’t have three joint leads on a deal that small.” So ANZ was relegated to co-lead with books of $3 million, which, says one observer, signalled the start of intense friction in the syndicate. “ANZ, which must have wanted the mandate themselves given their 100-year presence in Sri Lanka, were put out at their demotion. We heard that they were accusing Citi of making life difficult for them, using dirty tricks something must have happened because they were ready to walk out of the deal halfway through until the central bank intervened and persuaded them to stay.” The central bank, on the other hand, was pleased with the deal. “We wanted to stand up and be counted,” says Jayawardena. “There was no pressing need to issue, although we did use part of the proceeds to pay off some domestic debts which had a higher rate of interest. We’ll use the rest for infrastructure projects such as building highways. Our two aims were to set a benchmark for private-sector issuers, and to prepare the way for a rating by the end of the year.”
Setting a benchmark was the top priority, says a London-based analyst. “Historically the government and the private sector received most of their funding from the World Bank and the Asian Development Bank. The former has been redefining its role over the last two years: it will continue to fund infrastructure projects such as roads, hospitals and schools, but wants to leave the rest to the private sector.”
Equally as important for the government of Sri Lanka, a public bond issue gave it the opportunity to concentrate attention more on the resilience of the economy than on the conflict with the Tamil Tigers. It has a literate, well-educated populace, its GNP of $713 per head is roughly double that of India and Pakistan, and its annual GDP growth fluctuates between 5% and 10%. “The war has been mainly responsible for this fluctuation,” says Carralet. “But there are other ‘anomalies’ as well: last year, for example, there was a drought.” The vast proportion of Sri Lanka’s power supply is hydroelectric, so when one of the two monsoon seasons failed it had a significant impact on the economy.
Although Jayawardena would give no details of plans for future issuance, the feeling in the syndicate is that the government will not be a frequent issuer. “We’ll probably see them do one deal a year, just to keep their name out there and to maintain liquidity,” says one member. “And when they do, we’ll probably see different maturities and currencies.” Antony Currie
