Sri Lanka develops investor following with $1 billion global

Sri Lanka raised $1 billion in the debt markets early Tuesday morning, shrugging off concerns about its fiscal deficit and recent currency devaluation. The sovereign attracted a massive $10.5 billion order book from 425 accounts, a sign that it continues to broaden its following among investors.

“Since Sri Lanka issued its bond in 2007, it has improved its pricing each year and broadened its investor base,” said one source. “About 140 investors participated in its 2007 bond and, last year, 315 investors participated. This year, 425 investors came in. They could have upsized the bond given the strong demand, but they chose to be disciplined.”

According to the source, half of the proceeds will go towards refinancing its 2007 bond, which matures in October this year, and the rest will be used to finance infrastructure projects. Growth has rebounded since Sri Lanka’s civil war ended in 2009. However, it hasn't always been smooth sailing. Last year, amid a widening trade deficit, the country devalued its rupee by 3% to maintain the competitiveness of its exports.

Sri Lanka's 10-year bond priced at a yield of 5.875% versus the initial guidance which was in the area of 6.125%. The bonds performed well in the secondary markets, trading up more than a point from the par issue price to 101.25 on Wednesday.

In comparison, Sri Lanka paid a yield of 6.25% when it tapped investors with a $1 billion 10-year bond last year. Its latest deal also helped to tighten pricing of its outstanding bonds, as investors started to buy them when they heard that the new deal was going well and that it would be difficult to get allocations. The Sri Lanka 2021s, the most relevant comparable, were trading at 103.5 or a yield or 5.74% when the deal was announced, and rose by half a point to 104 on Wednesday.

Fund managers were allocated the bulk of the deal (90%), with banks and private banks allocated 6% and other investors 4%. US investors were allocated 44%, European investors 29% and Asian investors 27%. The bonds are rated B1/B+/BB- and mature on July 25, 2012. Bank of America Merrill Lynch, Barclays, Citi and HSBC were joint bookrunners.

The sovereign's success paves the way for other domestic issuers to tap the dollar markets. Today, People’s Leasing Company, a majority-owned subsidiary of People’s Bank, a Sri Lankan bank, kicks off a series of fixed-income investor meetings in Asia and Europe, and concludes them on Monday. A Reg-S US dollar bond may follow. Barclays and HSBC are the arrangers. According to a source, People’s Leasing Company (rated B+ by Standard & Poor’s and Fitch) has modest funding requirements and, as such, the deal size is not expected to be very large.