Sri Lanka on Monday sold Asia’s first sovereign note – a $1 billion five-year fixed-rate bond – of the year, achieving pricing inside its existing curve as investors rush to hold the emerging market’s rarely offered notes.
The 144a/Reg S bond, the country’s first since July 2012, ended up pricing 25bp tighter than its initial price guidance of 6.25%, according to a term sheet seen by FinanceAsia.
The nearest comparable for the note was Sri Lanka’s existing 2022s, which were trading around a cash price of 92.75 at a yield of 7.02% at time of pricing. After adjusting the curve, fair value of the new bonds was around 6.01%, according to a syndicate banker. This shows that the new notes priced slightly inside its existing curve.
“The new issue premium was nil to negative,” said a source close to the deal. “There is that high quality bid for the issuer, reflecting investors’ confidence in the nation’s credit story.”
“Also, it was a very smart issuance in the five-year bucket given that a lot of investors were keen to stay in the shorter duration area,” added the banker.
This is a good outcome for Sri Lanka, especially in an environment where the likes of the Republic of Indonesia (ROI) – which announced a sovereign deal on Tuesday – is paying a premium of between 40bp to 70bp for its dual-tranche bond, says the source.
In secondary markets, Sri Lanka’s bond trended up to trade at around 100.15 from par.
Promising macro outlook
The macroeconomic outlook of the country is promising, according to analysts.
Sri Lanka’s economy expanded by 7.2% last year, compared with 6.4% in 2012. The country is expected to grow 7.8% in 2014, with an average inflation target of 4%-6% and a lower interest rate regime, according to Sri Lanka’s central bank governor Ajith Nivard Cabraal at a forum in Colombo on January 2.
Also, Sri Lanka expects to graduate to the “upper middle income” category by 2016 and the central bank will fashion its macroeconomic policies accordingly to avoid the middle income trap.
The fact that Sri Lanka was the first country to issue a sovereign note in 2014 is a strong testament that the country is determined to boost its profile in capital markets and increase investor awareness, say syndicate bankers.
“In the past you have seen some of the more regular borrowers being the first ones in the market, but these guys [Sri Lanka] beat them to it this year,” said the head of debt capital markets at a global bank. “This reflects how savvy and nimble the Sri Lanka team has become over the years.”
Sri Lanka’s bond achieved an order book of $3.2 billion from 200 accounts. US investors were allocated a bulk of the notes – 62%, followed by Europe with 26% and Asia with 12%. Fund managers purchased 89% of the papers, followed by financial institutions with 8% and private banks with 3%.
Citi, HSBC, Standard Chartered and UBS were the joint bookrunners of the B1/B+/BB- rated notes.
Next sovereign deal
The ROI – a regular issuer in the international debt space – announced its first dollar benchmark sovereign deal for the year, which is slated to price as early as Tuesday.
The transaction will be split into two tranches of 10 and 30 years, and have an initial price guidance of around the 6.2% and 7.1% area respectively, accordingly to a term sheet.
Bank of America Merrill Lynch, Citi and Deutsche Bank are the joint bookrunners of the deal. Bahana Securities, Danareksa Sekuritas, Mandiri Sekuritas are the co-managers of the transaction.
