Sri Lanka looks to cut costs on sovereign bond

Jan 23, 2008 (LBO) — Sri Lanka is looking to cut interest costs on a fixed coupon 500 million dollar sovereign bond by using derivatives Central Bank Governor Nivard Cabraal said, as US interest rates continue to fall. Since then the rupee has been stable, making dollar loans – at whatever price – much cheaper than local borrowings.

Treasury Secretary P B Jayasundera has said Sri Lanka may go for a syndicated loan or a sovereign bond later in the year if conditions are right.

“We are looking for different ways of making the best deal for the country,” Cabraal told LBO.

“We have to be cautiously optimistic.”

Top investment banks made presentations to the government last week on ways to cut interest costs on the 5-year 8.25 percent bond, which is priced off US treasuries.

The bond was originally sold by a consortium including JP Morgan, Barclays, HSBC and Sri Lanka’s Bank of Ceylon.

Financial analysts say cost reduction strategies could include an interest rate swap which could change the rate on the bond floating from fixed and allow the country the benefit of falling rates, if interest rates fall further.

“There are derivatives in the market that could be used,” Cabraal said.

Yesterday the Federal Reserve unexpectedly cut short term rates by a further 0.75 percent before its scheduled meeting next week to stave of turmoil in equity markets, on the back of earlier rate cuts.

Though long term US treasuries don’t move exactly in time with short term rates especially if inflation expectations worsen, rate cuts usually have an effect along the yield curve.

Sri Lanka’s domestic treasury yields are around 18-19 percent, since the central bank tightened policy in the last quarter of 2007.