Sri Lanka extends yield curve with $1 billion issue

Sri Lanka comes to market with its largest and longest-dated sovereign ever, achieving the objective of extending its yield curve to 10 years.

The Democratic Socialist Republic of Sri Lanka has sold $1 billion of fixed-rate senior unsecured 10-year bonds -- the largest and longest-dated sovereign from the South Asian island nation ever. The notes pay a 6.25% coupon and were re-offered at par for the same amount of yield. On a spreads basis that translated into 373.1bp over 10-year Treasuries.

The market has seen credit spreads tighten and yields rally recently and as a result, demand for emerging market paper and longer-dated notes has picked up. Sri Lanka's new credit took advantage of both those trends.

A single-B credit doesn’t appeal to everybody, but it is included in the emerging market bond index, which helps and [hence it] appeals to emerging market-based funds globally," said a banker, noting that such funds were a key target as the country went on the road to meet up with key investors.

Sri Lanka was on the road throughout the course of last week, speaking with investors and selling a story not only of an emerging market sovereign credit, but of improved fundamentals surrounding the economy that led to a ratings upgrade by Standard and Poor’s earlier this month.

Following that upgrade, the new 2020 bonds received a B+ rating from both S&P and Fitch.

Based on the strong reception received from investors, the borrower went straight to the market with a yield guidance of 6.5%. The guidance was left unchanged throughout Hong Kong trading day on Monday, and by midday New York time, after US accounts had had a chance to look at the trade, the lead managers confirmed a final guidance of 6.25% to 6.375%. By then, they had already secured an order book of over $3 billion.

By the time the order books closed, the demand totalled $6.5 billion from 310 accounts. Incidentally, this equalled the size of the order book for Sri Lanka's $500 million 2015 sovereign issue last year, which was used as the most comparable benchmark for this deal.

During the Hong Kong trading session yesterday the bonds reached a high of 101.00 on a cash price basis. By the end of the day they had fallen slightly to 100.75 for a yield of 6.15%.

“At 10bp tighter (on a yield basis) this is a very solid performance without leaving too much value on the table for investors,” said one banker familiar with the deal.

The notes were issued under the 144A/Reg-S format and attracted strong interest from US-based accounts, which took 52.5% of the bonds.

“It was an asset that suited investor preferences in the US extremely well,” said one source. “Leading into the trade, there was a strong bid for 10-year assets in the US,” he added.

Europe bought a quarter of the notes offered and Asia took the remaining 22.5%. There were mixed reactions to the allocation with one source commenting that some accounts in Asia were asking why it was heavily skewed towards US accounts.

What it came down to, explained another source, was that the US was able to provide good quality orders, particularly through asset and fund managers.

Indeed, the bonds saw a strong bid from real money accounts, and fund managers and asset managers received 85% of the bonds, while the remainder was evenly distributed between pension and insurance funds, private banks and commercial banks.

Bank of America Merrill Lynch, HSBC and the Royal Bank of Scotland were joint lead managers for the offering.

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