Dollar bonds find favour in Sri Lanka as war jitters hit stocks

August 14 (LBO) – The oversubscription of a dollar bond issue was a reflection of the investor confidence in Sri Lanka government gilts, the country’s public debt office said in a statement Monday, as stocks lost ground over war jitters. The 3-year bond issue was more than twice oversubscribed when bids closed on August 11th.

“The eligible investors’ response to the issue is very encouraging and clearly reflects the investors’ confidence and their preference to lock their funds in longer tenure guilt edged Dollar Bonds issued by the Government of Sri Lanka,” the Superintendent of Public Debt C Premaratne said in a statement.

The statement came as the renewed fighting broke out in the Northern Jaffna peninsular after a weekend of violence left more many dead and the Tamil Tigers denied they had made peace overtures to the government.

Colombo stock market’s blue chip Milanka index lost 28 points or one percent in the first two hours of trading on Monday.

The market has become more resilient to violence in recent weeks, compared to the first quarter of the year.

“The deteriorating securities situation is putting is investors off,” says Vajira Premawardene, Head of Research at Lanka Orix Securities.

“There is no panic selling and investors without holding power are selling, but there is buying demand at lower levels.”

With the Sri Lanka rupee also under pressure, analysts say holding onto dollar assets makes good sense at whatever yield.

The government offered 150 million US dollars worth 3-year bonds and accepted bids for 175 million at a weighted average rate of 138.5 basis points above the 6-month London Interbank Offered Rate (LIBOR).

Dealers say the bonds are attractive because the interest is tax free.

Sri Lanka government rupee debt has withholding tax and interest is taxable in the hands of investors.

With 6-month LIBOR at 5.35 percent, investor would get a nominal yield of 6.7 percent, but the tax free status gives a person or a corporate in the 35 percent income tax bracket effective earnings close to 10.3 percent, dealers said.

“Where else can you get this kind of return for dollars? a dealer asked.

“This is an extremely attractive investment opportunity.”

Another bond, called the ‘Patriotic Bond’ available in retail volumes and priced at around the US treasury rates has failed to generate as much interest.

Sri Lanka’s banks pay around 4 percent for dollar deposits in their non-resident foreign currency units.

A bank investing in rupee government bonds gets around 11 percent, but the income is taxable.

So far this year the government has issued 475 million worth dollar denominated Sri Lanka Development Bonds, which the Public Debt Department said was within the limits approved by Parliament.

The government has been increasing its reliance of commercial dollar debt during the past two years. Dollar borrowing at commercial rates to bridge the budget deficit has come under fire from the opposition and other analysts as an imprudent fiscal measure.