By Madhusha Thavapalakumar
Sri Lanka’s International Sovereign Bonds’ (ISBs) secondary market yield rates have risen alarmingly since the identification of the first Sri Lankan Covid-19 patient in March and the strict islandwide curfew imposed subsequently to contain the spread of the virus, which unfortunately served to bring the economy to an almost complete halt.
The yield rates, which were earlier hovering around their original rates of primary issuance (coupon rates), have increased by double digits since the second week of March and continue to remain at high levels.
This time, there were also two rating actions on Sri Lanka by two of the big three credit rating agencies in the world, Fitch and Moody’s, which have certainly not helped matters.
On 17 April, Moody's Investors Service placed the Government of Sri Lanka's long-term foreign currency issuer and senior unsecured B2 ratings under review for downgrade.
“The Government's external debt service payments amount to approximately $ 4 billion between 2020 and 2025 (1), in addition to financing part of the wider budget deficit externally. International sovereign bonds account for a sizeable portion of maturing government debt over this period, including upcoming payments of $ 1 billion each in October 2020 and July 2021. In the current market conditions, refinancing these maturities on international markets would come at considerable costs,” it said in its statement.
Thereafter, on 24 April, Fitch Ratings downgraded Sri Lanka's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to 'B-' from 'B', with a Negative Outlook.
“Sri Lanka's external financing challenges have increased in the current environment of global risk aversion and financial market volatility, with large upcoming external debt redemptions and limited foreign-currency (FX) reserves. Its reserves are about $ 7.2 billion, while the sovereign's external debt payments from May to December 2020 amount to $ 3.2 billion, including a $ 1 billion international sovereign bond payment due in October. Fitch estimates Sri Lanka's external liquidity ratio, defined as liquid external assets/external liabilities, at about 64%, among the weakest in the 'B' rating category,” Fitch noted in its rating action.
Of these two actions, it is Fitch’s downgrade that has hurt the most, with a dramatic spike in the yield rate of the ISBs in the week following the Fitch announcement.
Sri Lanka’s 14 ISBs
Sri Lanka currently has 14 ISBs that reach maturity between 2020 and 2030. Almost all the ISBs have followed a similar trend since 6 March. Yield rates of the ISBs were somewhat closer to their coupon rates as of 6 March. However, they saw a dramatic increase either during the week ended on 3 April or 10 April. Even though most of the ISBs recorded declined yield rates the following week, they once again rose to early or mid-April levels last week, excluding very few ISBs that reach maturity in the near term.
Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value.
The ISB that reaches maturity in October this year is a 10-year ISB of $ 1 billion, with a coupon rate of 6.25%, to repay some high-cost domestic borrowings. This was the third ISB issuance since Sri Lanka started issuing ISBs in 2007.
This was 4.50% as at 6 March, a week prior to the first Covid-19 patient being reported. It increased dramatically to 91.93% on 3 April and dropped to 39.23% on 30 April. However, last week it hiked to 44.42%.
In July 2011, the Government issued an ISB amounting to $ 1 billion. The issue had a maturity of 10 years at a fixed rate yield of 6.25%. According to Central Bank of Sri Lanka’s (CBSL) annual reports, the funds were utilised to restructure the Government’s outstanding debt stock with the retirement of some high-cost debt, and helped reduce pressure on domestic resources and interest rates.
The yield rate of this ISB was even lower than the coupon rate as it was 4.78% as at 6 March. It increased to 41.37% on 3 April. However, at the end of the week ended on 30 April, the yield rate of the ISB was reported as 34.22%. This ISB’s yield rates too increased last week as it was reported at 38.91%.
Sri Lanka successfully issued its fifth ISB of $ 1 billion in July 2012, with a comparatively lower yield of 5.875% per annum and a maturity of 10 years. Most of this inflow was directed to the continuation of major infrastructure projects which commenced in 2010 and 2011. This bond reaches its maturity in July 2022 and was at a yield rate of 5.20% on 6 March. It increased to its highest on 10 April to 31.79% and recorded as 28.34% on 30 April. However, last week it exceeded mid-April levels and reported as 32.06%.
In 2013, Sri Lanka did not issue any ISBs. The Government raised $ 2.15 billion through the issuance of ISBs during 2015. In May 2015, the Government successfully issued ISBs to the value of $ 650 million with a maturity period of 10 years at a progressively lower yield rate of 6.125% per annum.
This bond was 6.74% during the first week of March this year and this hiked up to 19.62% on 10 April. This has dropped slightly to 18.87% on 30 April. However, it reached its peak since March, during last week, as it reported a yield rate of 20.44%.
In addition, in October 2015, ISBs to the value of $ 1.5 billion were issued at a yield rate of 6.85% per annum with a maturity period of 10 years. This was Sri Lanka’s largest offering within a year in the international bond market since the first ISB was issued in 2007.
The ISB which reaches maturity in November 2025 was at a yield rate of 6.75% during the first week of March, which then shot up to 19.48% on 10 April. However, on 30 April, this dropped to 19.20% but during the week ended on 6 April, it increased to 20.75%.
The Government successfully issued its 10th ISB in 2016, reflecting improved investor sentiment on Sri Lanka. Accordingly, the Government was able to raise $ 1.5 billion in July 2016 through the first dual-tranche offering of 5.5-year ($ 500 million) and 10-year ($ 1 billion) bonds at yield rates of 5.750% and 6.825%, respectively, amidst high volatility in the global markets.
The 5.5-year ISB was at a yield rate of 4.95% on 6 March. It hiked to 36.88% on 10 April this year. Even though it saw a decline the following week, once again it hiked to 35.86% on 30 April. It further increased to 38.9% last week.
The 10-year ISB which reaches maturity in July 2026 was at 7.08% during the first week of March this year, which gradually increased and reached its peak of 18.98% on 10 April before recording a slight drop to 18.05% in the last week of April. However, during last week it increased once again to 19.39%.
The Government was able to raise $ 1.5 billion in May 2017 with a 10-year maturity at a yield of 6.2% per annum. Yield rates of this ISB were at 7.33% during the first week of March and that 17.91% at the end of the first week in April. However, it reduced to 16.53% in the last week of the same month. However, it reached early April levels last week as it increased to 17.69%.
In April 2018, the CBSL issued $ 1.25 billion five-year and $ 1.25 billion 10-year ISBs with maturity dates in April 2023 and April 2028, with 5.75% and 6.75% yield rates, respectively. This is the largest bond offering raised by Sri Lanka, surpassing the $ 2.15 billion raised in 2015.
The five-year bond’s yield rate was 5.69% before the local spread of Covid-19 and it increased to 26.63% on 10 April. It fell to 25.28% on 30 April. It reached its peak levels last week as it ended on 27.26%.
Yield rates of the 10-year bond were 7.62% during the first month of March 16.83% on 10 April. Even though it declined the following week, it rose again at the end of April as it was reported at 16.57%. It further rose to 17.33% last week.
In March last year, CBSL returned to USD bond markets, pricing a new issuance of $ 1 billion five-year and $ 1.4 billion 10-year bonds with maturity dates of March 2024 and March 2029, respectively.
The five-year bond’s yield rates were 6.19% as at 3 March and went up to 24.24% on 10 April. However, it reduced and recorded 22.32% on 30 April. However, last week it reached mid-April levels as it grew to 24.81%.
Meanwhile, the 10-year bond’s yield rates were 7.85% on 3 March and it increased to 17.74% in April and even as of 30 April, the rate was above 17%. It increased further last week to 24.81%.
Last June, the CBSL issued $ 500 million five-year and $ 1.5 billion 10-year bonds with maturity dates in June 2024 and March 2030, respectively. The yield rates of the five-year bond were 6.27% on 3 March which rose significantly to 27.47% on 10 April before dropping to 20.95% on 30 April. However, it increased to 22.86% last week.
Meanwhile, the 10-year bond’s yield rates were 7.95% on 03 March and it increased to 17.74% on 3 April. However, it recorded as 16.47% on 30 April before increasing once again to 17% last week.
This time, there were also two rating actions on Sri Lanka by two of the big three credit rating agencies in the world, Fitch and Moody’s, which have certainly not helped matters.
On 17 April, Moody's Investors Service placed the Government of Sri Lanka's long-term foreign currency issuer and senior unsecured B2 ratings under review for downgrade.
“The Government's external debt service payments amount to approximately $ 4 billion between 2020 and 2025 (1), in addition to financing part of the wider budget deficit externally. International sovereign bonds account for a sizeable portion of maturing government debt over this period, including upcoming payments of $ 1 billion each in October 2020 and July 2021. In the current market conditions, refinancing these maturities on international markets would come at considerable costs,” it said in its statement.
Thereafter, on 24 April, Fitch Ratings downgraded Sri Lanka's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to 'B-' from 'B', with a Negative Outlook.
“Sri Lanka's external financing challenges have increased in the current environment of global risk aversion and financial market volatility, with large upcoming external debt redemptions and limited foreign-currency (FX) reserves. Its reserves are about $ 7.2 billion, while the sovereign's external debt payments from May to December 2020 amount to $ 3.2 billion, including a $ 1 billion international sovereign bond payment due in October. Fitch estimates Sri Lanka's external liquidity ratio, defined as liquid external assets/external liabilities, at about 64%, among the weakest in the 'B' rating category,” Fitch noted in its rating action.
Of these two actions, it is Fitch’s downgrade that has hurt the most, with a dramatic spike in the yield rate of the ISBs in the week following the Fitch announcement.
Sri Lanka’s 14 ISBs
Sri Lanka currently has 14 ISBs that reach maturity between 2020 and 2030. Almost all the ISBs have followed a similar trend since 6 March. Yield rates of the ISBs were somewhat closer to their coupon rates as of 6 March. However, they saw a dramatic increase either during the week ended on 3 April or 10 April. Even though most of the ISBs recorded declined yield rates the following week, they once again rose to early or mid-April levels last week, excluding very few ISBs that reach maturity in the near term.
Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value.
The ISB that reaches maturity in October this year is a 10-year ISB of $ 1 billion, with a coupon rate of 6.25%, to repay some high-cost domestic borrowings. This was the third ISB issuance since Sri Lanka started issuing ISBs in 2007.
This was 4.50% as at 6 March, a week prior to the first Covid-19 patient being reported. It increased dramatically to 91.93% on 3 April and dropped to 39.23% on 30 April. However, last week it hiked to 44.42%.
In July 2011, the Government issued an ISB amounting to $ 1 billion. The issue had a maturity of 10 years at a fixed rate yield of 6.25%. According to Central Bank of Sri Lanka’s (CBSL) annual reports, the funds were utilised to restructure the Government’s outstanding debt stock with the retirement of some high-cost debt, and helped reduce pressure on domestic resources and interest rates.
The yield rate of this ISB was even lower than the coupon rate as it was 4.78% as at 6 March. It increased to 41.37% on 3 April. However, at the end of the week ended on 30 April, the yield rate of the ISB was reported as 34.22%. This ISB’s yield rates too increased last week as it was reported at 38.91%.
Sri Lanka successfully issued its fifth ISB of $ 1 billion in July 2012, with a comparatively lower yield of 5.875% per annum and a maturity of 10 years. Most of this inflow was directed to the continuation of major infrastructure projects which commenced in 2010 and 2011. This bond reaches its maturity in July 2022 and was at a yield rate of 5.20% on 6 March. It increased to its highest on 10 April to 31.79% and recorded as 28.34% on 30 April. However, last week it exceeded mid-April levels and reported as 32.06%.
In 2013, Sri Lanka did not issue any ISBs. The Government raised $ 2.15 billion through the issuance of ISBs during 2015. In May 2015, the Government successfully issued ISBs to the value of $ 650 million with a maturity period of 10 years at a progressively lower yield rate of 6.125% per annum.
This bond was 6.74% during the first week of March this year and this hiked up to 19.62% on 10 April. This has dropped slightly to 18.87% on 30 April. However, it reached its peak since March, during last week, as it reported a yield rate of 20.44%.
In addition, in October 2015, ISBs to the value of $ 1.5 billion were issued at a yield rate of 6.85% per annum with a maturity period of 10 years. This was Sri Lanka’s largest offering within a year in the international bond market since the first ISB was issued in 2007.
The ISB which reaches maturity in November 2025 was at a yield rate of 6.75% during the first week of March, which then shot up to 19.48% on 10 April. However, on 30 April, this dropped to 19.20% but during the week ended on 6 April, it increased to 20.75%.
The Government successfully issued its 10th ISB in 2016, reflecting improved investor sentiment on Sri Lanka. Accordingly, the Government was able to raise $ 1.5 billion in July 2016 through the first dual-tranche offering of 5.5-year ($ 500 million) and 10-year ($ 1 billion) bonds at yield rates of 5.750% and 6.825%, respectively, amidst high volatility in the global markets.
The 5.5-year ISB was at a yield rate of 4.95% on 6 March. It hiked to 36.88% on 10 April this year. Even though it saw a decline the following week, once again it hiked to 35.86% on 30 April. It further increased to 38.9% last week.
The 10-year ISB which reaches maturity in July 2026 was at 7.08% during the first week of March this year, which gradually increased and reached its peak of 18.98% on 10 April before recording a slight drop to 18.05% in the last week of April. However, during last week it increased once again to 19.39%.
The Government was able to raise $ 1.5 billion in May 2017 with a 10-year maturity at a yield of 6.2% per annum. Yield rates of this ISB were at 7.33% during the first week of March and that 17.91% at the end of the first week in April. However, it reduced to 16.53% in the last week of the same month. However, it reached early April levels last week as it increased to 17.69%.
In April 2018, the CBSL issued $ 1.25 billion five-year and $ 1.25 billion 10-year ISBs with maturity dates in April 2023 and April 2028, with 5.75% and 6.75% yield rates, respectively. This is the largest bond offering raised by Sri Lanka, surpassing the $ 2.15 billion raised in 2015.
The five-year bond’s yield rate was 5.69% before the local spread of Covid-19 and it increased to 26.63% on 10 April. It fell to 25.28% on 30 April. It reached its peak levels last week as it ended on 27.26%.
Yield rates of the 10-year bond were 7.62% during the first month of March 16.83% on 10 April. Even though it declined the following week, it rose again at the end of April as it was reported at 16.57%. It further rose to 17.33% last week.
In March last year, CBSL returned to USD bond markets, pricing a new issuance of $ 1 billion five-year and $ 1.4 billion 10-year bonds with maturity dates of March 2024 and March 2029, respectively.
The five-year bond’s yield rates were 6.19% as at 3 March and went up to 24.24% on 10 April. However, it reduced and recorded 22.32% on 30 April. However, last week it reached mid-April levels as it grew to 24.81%.
Meanwhile, the 10-year bond’s yield rates were 7.85% on 3 March and it increased to 17.74% in April and even as of 30 April, the rate was above 17%. It increased further last week to 24.81%.
Last June, the CBSL issued $ 500 million five-year and $ 1.5 billion 10-year bonds with maturity dates in June 2024 and March 2030, respectively. The yield rates of the five-year bond were 6.27% on 3 March which rose significantly to 27.47% on 10 April before dropping to 20.95% on 30 April. However, it increased to 22.86% last week.
Meanwhile, the 10-year bond’s yield rates were 7.95% on 03 March and it increased to 17.74% on 3 April. However, it recorded as 16.47% on 30 April before increasing once again to 17% last week.