Carrier sells Sri Lanka's first corporate bond

SriLankan Airlines has raised $175 million from international debt capital markets — the first company to do so.

SriLankan Airlines sold a capped $175 million five-year senior bond on Monday, becoming the island nation's first-ever corporate debt issuer on international capital markets.

The state-run carrier’s international bond offering is the second so far this year from the so-called frontier market of Sri Lanka, after the government sold a landmark $1 billion five-year note in January.

SriLankan Airlines priced its note, which is guaranteed by the country's government, at the tighter end of its final price guidance of 5.3% to 5.35%, having already seen it tighten by more than 30bp from an initial price guidance of 5.625%, according to a term sheet seen by FinanceAsia.

Investor interest in the offering was underpinned by the continued global scramble for yield at a time when interest rates are low, one syndicate banker said. That was reinforced last week when Federal Reserve chair Janet Yellen said at the Federal Open Market Committee meeting that US rates will remain at record lows for the foreseeable future.

“Borrowers are taking advantage of low rates and investors continue to chase yield in the belief that interest rates are likely to stay flat for longer than expected,” the syndicate banker said.

The US central bank noted the US economy’s rebound in the past few weeks after output shrank in the first quarter, forcing officials to lower their expectations for growth. The benchmark 10-year US Treasury yield was little changed at 2.62% on Tuesday, according to Bloomberg. It is up from 2.48% at the end of May but still much lower than the 3% level seen in the beginning of this year. 

Rising risks

Key risks emerging from Sri Lanka could dampen down demand for future corporate debt issues  without strong state-backing, credit analysts said.

Fitch Ratings in a recent report said the South Asian nation suffered from substantial twin deficits and that the government debt burden remains relatively high. Sri Lanka’s total government debt — including foreign and domestic — amounted to $52 billion, which was 78.3% of its gross domestic product in 2013, according to the Ministry of Finance. Even so, the country’s debt levels have declined from 2002’s peak, when it reached 105.6% of GDP.

SriLankan Airlines’ credit profile has also been improving, with passenger numbers increasing to 4.3 million in 2013 from 2.6 million in 2010.

As the country's leading airline, the company is well-positioned to capture the benefits of the government’s policy to promote and develop tourism on the island, Nandini Vijayaraghavan, credit analyst at Fitch said.

Asian investors subscribed to 60% of the SriLankan Airlines notes, with those in Europe accounting for 25% and those in the Middle East the rest, according to a source familiar with the matter. Financial institutions and funds purchased 85% of the paper, while the remainder went to private banks.

The national carrier signed a memorandum of understanding with Airbus last June for six A330-300s and four A350-900s. The proceeds of the bond will be used to finance pre-delivery aircraft payments and for working capital purposes, according to the term sheet.

The Sri Lankan government holds 92% of SriLankan Airlines directly and 7% indirectly through straight-owned entities.

Standard Chartered was the sole bookrunner of the transaction.

South Asia’s pipeline

Elsewhere in the South Asia region, Rolta India, a Mumbai-based provider of IT solutions, has mandated Barclays and Citi to arrange a series of fixed income investor meetings in Asia, US and Europe commencing June 25.

Some $10.7 billion has been raised in debt so far this year in South Asia, according to Dealogic data. That's spread across 18 debt capital market transactions in India, Pakistan, Sri Lanka and Bangladesh and is marginally higher than the $10.2 billion and 15 deals seen over the same period last year.

Some of the more recent deals from the region include Syndicate Bank’s $400 million 5.5-year bond at end-May and Bharti Airtel’s $2 billion dual-tranche multicurrency offering in mid-May.

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