Commercial Bank structures derivative deal for its leasing unit

Sri Lanka’s Commercial Bank of Ceylon, has structured an interest rate swap with a notional value of Rs. 500 million for its leasing subsidiary, the bank said Friday. Sri Lanka’s Commercial Bank of Ceylon, has structured an interest rate swap with a notional value of Rs. 500 million for its leasing subsidiary, the bank said Friday. Under the IRS, Commercial Leasing Ltd will pay a floating rate based on the Average Weighted Prime Lending Rate (AWLPR) to Commercial Bank’s corporate credit arm, in return for a fixed rate.

The swap will allow Commercial Leasing to fix its borrowing cost on the Rs. 500 million for three years.

Leases are issued at fixed rates (four-years being most popular for motor vehicles) but it is not always possible to raise medium term funds at fixed rates, leaving leasing firms exposed to interest rates risk.

But commercial banks, generally carry a large portfolios of short-term working capital and trade finance based lending.

“It’s the first interest rate swap for the bank and a win-win situation for both parties,” Commercial Bank’s Head of Treasury Palitha Narangoda told LBO.

“The floating interest rate will be revised every quarter.”

The AWPLR is now 10.83 percent, but the bank did not disclose either the fixed rate in the swap or the premium.

Set up in 1988, Commercial Leasing provides a wide range of services including finance leasing, operating leasing, hire purchase and debt factoring.

The firm posted a Rs. 237 million pre-tax profit in year 2004 and was able to notch a Rs. 80 million pre-tax profit in the first quarter of 2005 (up 60 percent over the previous quarter).

On average, Commercial Leasing raises over a billion rupees each year to keep its Rs. 6 billion leasing business ticking.

Presently, 30 percent of Commercial Leasing is controlled by Commercial Bank, 36.6 percent by Chemanex Ltd., 30 percent Singer Sri Lanka and the balance by the public.

(US$ 1 = Rs. 100)

-Mel Gunasekera: mel@vanguardlk.com