Its A Wrap

Upcoming debt market specialist, National Wealth Corp. wrapped up a complex debt-restructuring deal for the governments supermarket chain.
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Arnconsortium of six commercial banks endash Bank of Ceylon, Peoples Bank,rnCommercial Bank, HSBC, Hatton National Bank and Seylan Bank endash inked the dealrnon Monday, in what NatWealth claims is the largest debt restructuring deal inrnSri Lanka.

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ThernCooperative Wholesale Establishment or Sathosa, ran up debts to the tune of Rs.rn6.1 bn, under the previous government.

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Somernof its lenders even sought legal redress to recover their monies from Sathosa.

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However,rnunder NatWealths deal, its lenders have accepted a Treasury backed tradablernbond and a little cash.

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Bankersrnalso agreed to reduce their lending exposure to Rs. 4.9 bn.

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Tornpacify its bankers, Sathosa paid Rs. 500 mn in cash, out of the Rs. 680 mn itrnreceived after selling a 40 percent stake and management control to a consortiumrnled by Ceylon Biscuits.

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ldblquote Whatrnwe have offered allows the treasury to give comfort to the banks, withoutrnactually exposing itself to the whole debt, and also avoids any cashrnoutflows,
dblquote explains NatWealth CEO, Mangala Boyagoda.

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Thernfirst step, NatWealth has bundled CWEs Rs. 1.8 bn worth mainly real estaternassets to a special purpose vehicle (SPV). In this case, the governmentsrnprivatisation arm, the Public Enterprise Reform Commission or PERC, will playrnthe role of a SPV.

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Arntwoendash year zero coupon deep discount security with a face value Rs. 2.1 bn isrnthen issued to the Treasury by the SPV.

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Whenrncash comes from the Treasury it is passed on to CWE. The CWE then gives the Rs.rn1.8 bn back to the treasury.

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Inrnreturn, CWE gets a 13-year zero coupon deep discount treasury bond with a facernvalue that is equal to the principle amount of the unpaid loans.

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ldblquote Becausernthe treasury gets back the money given to the SPV immediately, there is no cashrnoutflow from the government,
dblquote says Boyagoda.

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Thern13-year deep discount bond is then used to back the principle amount of arnmarketable interest-bearing CWE security.

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CWErnalso issues a semi-annual interest coupon to its bankers, of which the Treasuryrnguarantees 50 percent of its interest.

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Therninterest is serviced out of an estimated Rs. 300 mn cash flows the CWE is due tornget from its commercial activities, especially Sathosa chain ofrnsupermarkets.

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Thisrninterest bearing, government bond backed security can either be sold in thernmarket and the proceeds given to CWEs creditor banks, or the security itselfrncan be issued to banks to settle the loans.

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Thernbanks can hold instrument or sell it in the market and raise cash.

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ldblquote Thernadvantage of this structure is that it allows the CWE to reduce its borrowingrncosts by Rs. 200 mn each year, and at the sametime cleaning up its balancernsheet,
dblquote explains Boyagoda.

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Thernstructure also allows banks to convert a book loan into a government bond, whichrnin turn helps them to reduce their capital adequacy ratios and improve theirrnnon-performing loan portfolios.

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Commentingrnon the transaction, Commerce & Consumer Affairs Minister, Ravi Karunanayakernsays other government institutions can use this model to clean up their balancernsheet.

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-LBO Newsdesk: LBOEmail@vanguardlanka.comrn

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