Roadshow begins for Sri Lankan bond

The sovereign begins investor meetings this week for its benchmark maiden bond.
The roadshow for Sri LankaÆs sovereign bond began yesterday in a favourable climate, as US job creation figures released on Friday were higher than expected, implying a reduction in US recession risk.

Barclays Capital, HSBC and JPMorgan have been mandated by Sri Lanka and are organising investor meetings in Asia, Europe and the US.

The sovereign's maiden bond, expected to be up to $500 million in size, comes after two years after the country first announced that it would tap the international bond market. At the time, the plans were put on hold as the country found cheaper financing through loans.

This time around Sri Lanka is issuing into a market still recovering from the subprime turmoil. Investors are requiring much higher premiums for bond offerings, so it will be interesting to see whether Sri Lanka finally goes through with the latest deal.

Officials from the opposition party in Sri Lanka voiced concerns that the country would not be able to maintain the payments on the bonds, but the transaction was nonetheless approved by parliament. The opposition also threatened to revoke HSBCÆs local license if the sovereign issue were to go ahead, according to a Reuters report.

ôGiven its history, Sri Lanka will have to be very clear about its intentions. My opinion is that they should be very defensive and try to capture the bank market with a five-year tenor,ö says one syndicate banker.

ôThe market is recovering. Five-year CDS for Indonesia, arguably the most liquid, reached 230 at the peak of the subprime crisis, and is now down to 135, which is an 80% recovery as far as emerging market sovereign debt is concerned," the banker continues. "Resuming plans or announcing new deals at this time is probably not a bad idea. But although we are looking at a cautiously optimistic market, the curve is likely to get steeper or remain relatively steep for the remainder of the year. This suggests a transaction at the shorter end."

Standard and PoorÆs has assigned a B+ rating to the sovereign, which reflects the positive fiscal developments that have allowed improvements on both revenue and expenditure. On the flip side, the rating also takes into account the high level of government indebtedness, ongoing primary deficits, and the unresolved separatist conflict.

Today's more benign credit environment has spurred the announcement of a number of high-yield deals. Improving US credit conditions, the return of EM carry trades and the continued equity rally have raised the question of whether the US Federal Reserve needs to cut rates again in October, according to a JPMorgan report.

Recent announcements include Hang Fung, the Hong Kong jewellery manufacturer and retailer, which mandated HSBC to manage a seven-year $150 million senior unsecured bond offering. Some press reports also state that Vietnam is due to announce its long-awaited benchmark transaction this week.
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