Aug 06, 2008 (LBO) – A veteran fixed income specialist says Sri Lanka’s debt market has still to show its full potential though it is 15 years since the first commercial paper was issued in the island. The first commercial paper was issued by John Keells Holdings and Aitken Spence, with a guarantee from state-run Bank of Ceylon on August 6, 1993.
The deal was structured by Waldock McKenzie, financial services unit of JKH, which was headed at the time by Mangala Boyagoda, a pioneer in Sri Lanka’s debt markets.
Commercial paper, usually issued for three months and benchmarked on Treasury yields, allowed companies to raise working capital directly from the market without going through banks.
“This was the first dis-intermediation process to take place in this country,” says Boyagoda, who now heads the Wealth Trust Corporation, a firm he has newly founded.
“Dis-intermediation process means to bypass the intermediary and meeting the borrower and lender outside the banking system.”
Guaranteeing or structuring commercial paper also allowed Bank of Ceylon to earn fee income by making use of the risk management expertise.
“At the time no other commercial bank saw the potential of promoting debt instruments,” says Boyagoda.
Boyagoda also structured the first forward rate agreement in 1994 and an asset backed security that helped generate money by using future cashflows due from a deep discount bond in 1997.
Commercial paper with caps and floors and some linked to a share price index were also issued.
According to Central Bank data, which tracks commercial paper that pass through banks, there were about a billion rupees of paper held by banks.
Boyagoda reckons there are about 20 billion rupees worth paper and pro-notes in the over-the-counter market. But secondary market trading in such instruments has now come to a halt with a withholding tax making trading almost impossible.
A further 28 to 30 billion in longer-term securitized instruments, issued largely by leasing companies are also around, based on a cursory survey of information available with trustees, says Boyagoda.
Some of the firms were going with rated asset backed securities and others were using entity ratings.
He says there is still a heavy dependence on the banking system both by savers and borrowers.
“Today most of the investors in our country are savers, not investors,” says Boyagoda.
“That is the problem. That is why our capital market is not developed.”
He says investors should look at credit risk, liquidity and return and invest according to their needs and risk appetite.
The Wealth Trust Corporation, which is running with an asset management license from the Securities and Exchange Commission, wants to offer a planned investment program for clients.
On its board are Ranjith Fernando, former chief of National Development Bank, Eastman Narangoda, former head of National Savings Bank and Wickrema Weerasooiya, Sri Lanka’s insurance ombudsman.
“What we are hoping to do [is to move] from the traditional saving method to investment,” says Boyagoda.
“We are developing investment plans for people; for high net worth individuals, corporates and provident funds. So we will come up with an investment plan depending on the risk appetite of the client.”
The company will agree on a benchmark with clients and seek to outperform the benchmark. But unlike standard saving accounts in a bank, there is no guaranteed rate.
“For example, to buy a treasury bill you don’t need to come to us. Why should you?” he asks.
“You need something better. So we fix a three months or one year benchmark and on top of it we add a premium. For example we say ‘If you are come to us our benchmark would be T-bill plus 1 percent. End of it if I perform more than that, I take part of that’.”