Sri Lanka's Perpetual Treasuries profits up 434-pct to Rs5.1bn

ECONOMYNEXT - Perpetual Treasuries Limited, a primary gilt dealership, connected the family of a controversial former Sri Lanka central bank governor, has made a profit of 5.1 billion rupees for the year to March 2016 up 434 percent from a year earlier, published data show.

The firm reported capital gains of 5.2 billion rupees from bond trading in the year to March 2016, up 581 percent from 767 million rupees a year earlier, accounts published in Sri Lanka's Sunday Observer newspaper showed.

Under central bank regulations, all primary dealers have to publish their accounts.

Return on beginning-of-the-equity of 1,065 million was 481 percent.

Sri Lanka's bond markets were hit by a series of controversial bond auctions involving allegations rigging and insider dealing in 2015 and 2016 during the tenure of ex-Central Bank Governor Arjuna Mahendran.

Perpetual Treasuries is connected to Mahendran's son-in-law and he came under fire over conflicts of interest as long term bonds were sold at high rates where large volumes.

Sri Lanka's President Maithripala Sirisena declined to renew Mahendran's term of office amid the allegations, which became the focus of a parliamentary inquiry.

Mahendran has denied wrongdoing.

Interest income at Perpetual Treasuries rose 162 percent to 942.8 million rupees and interest expenses rose 132 percent to 589.1 million rupees, and net interest income rose 233 percent to 353 million rupees.

The majority of profits of a primary dealer however comes from capital gains. Primary dealers in government securities, bids at government bond auctions and sell them to other buyers making a margin.

The price of a government bond rise when interest rates falls and the price falls when interest rates go up.

When rates fall, a dealer with a portfolio can sell and make profits from bond bought at a higher interest rate (low price). Interest rate volatility provides opportunities for dealers to make gains by selling down their portfolio.

Concerns were raised that after selling government bonds at high interest rates (low prices) by accepting sharply higher volumes of bids from favoured dealers effectively rigging the auctions, the bonds were then dumped dealers at low rates (high prices) on the Employees Provident Fund, which was managed by the central bank.

Sri Lanka Treasuries yields fall sharply

ECONOMYNEXT - Sri Lankan Treasury Bill yields fell sharply at Wednesday’s auction with the 03-month bill down 16 basis points to 8.55 percent from 8.71 percent last week, data from the debt office showed.

The yield on the 06-month bill fell 30 basis points to 9.39 percent from 9.69 percent last week, the debt office, a unit of the central bank, said.

The yield on one-year bills fell 27 basis points to 10.11 percent from 10.38 percent last week.

The debt office got bids worth Rs85 billion and accepted bods of Rs21 billion.

Sri Lanka's Distilleries on negative credit watch

ECONOMYNEXT – Fitch Ratings said it has placed Distilleries Company of Sri Lanka PLC's National Long-Term Rating of 'AAA(lka)' on Rating Watch Negative (RWN) after a group share swap and restructuring that could increase borrowings and dividend payments.

The rating agency said that in the restructuring in the group in August 2016, Melstacorp (MC), a 100% subsidiary of Distilleries, issued new shares to Distilleries for which the maker of alcoholic beverages paid with a Rs24.8 billion promissory note.

Shareholders of Distilleries are due to swap their shares for shares in MC on 30 September 2016, after which Distilleries will become a fully owned subsidiary of MC.

“The RWN reflects the potential for an increase in financial risks to Distilleries,” a Fitch statement said.

“Fitch believes that this, combined with the risk of higher dividends to Melstacorp (MC) could lead to a weakening in Distilleries' credit metrics. Resolution of the RWN will depend on how the company manages the promissory note obligation and recapitalises the company.”

The full Fitch statement follows:

Fitch Ratings-Colombo-28 September 2016: Fitch Ratings has placed Distilleries Company of Sri Lanka PLC's (DIST) National Long-Term Rating of 'AAA(lka)' on Rating Watch Negative (RWN).

The rating action follows a restructuring in the group. In August 2016, Melstacorp (MC), a 100% subsidiary of DIST, issued new shares to DIST for which the maker of alcoholic beverages paid with a LKR24.8bn promissory note. Shareholders of DIST are due to swap their shares for shares in MC on 30 September 2016, after which DIST will become a fully owned subsidiary of MC.

The RWN reflects the potential for an increase in financial risks to DIST. Fitch believes that this, combined with the risk of higher dividends to MC could lead to a weakening in DIST's credit metrics. Resolution of the RWN will depend on how the company manages the promissory note obligation and recapitalises the company.

Fitch expects to resolve the RWN once we are able to fully assess DIST's capital structure. Although the company plans to complete various transactions impacting its capital structure in the next three months, a resolution of the RWN could take longer than the typical six-month period if these plans are delayed.

KEY RATING DRIVERS

Rising Financial Risks: The financial profile of DIST has weakened as it now has a LKR24.8bn liability due to the purchase of new MC shares. However, there has been no cash outflow and the company is looking at several alternatives to meet this obligation, including a new share issue by DIST. Following the share swap, DIST will have a negative net asset position as it will write down its investment in MC. In addition, dividends to MC from DIST could also increase, which could put pressure on DIST's rating.

Likely to Raise Equity: DIST does not plan to borrow to meet the promissory note obligation and plans to raise new equity, which could contain DIST's leverage within acceptable levels for its 'AAA(lka)' rating. However, if DIST borrows to meet the promissory note obligation, leverage as measured by net adjusted debt to EBITDAR could increase to above 3.0x.

Historically Conservative Capital Structure: DIST has until now adopted a conservative capital structure as reflected in its low leverage of 0.8x at the end of the financial year to March 2016 (FYE16). The leverage calculation also takes into account group debt guaranteed by DIST. DIST's borrowings are entirely short-term in nature and fund working capital requirements. Although the company may raise new equity to satisfy the promissory note, MC's growth plans could rely on increased dividends from DIST, which will restrict DIST's free cash generation.

Resilient Business Profile: DIST continues to be the market leader in alcoholic beverage production in Sri Lanka due to its strong brands, which drive demand and access to retail points across the island. As of the latest published statistics, DIST produced 67% of Sri Lanka's hard liquor. We expect profitability to remain healthy with EBITDAR margin of over 35% in the medium term (41% in FY16), supported by DIST's ability to pass on tax increases to the consumer.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for DIST include:

- Revenue to grow by mid-single digits over the next three years

- EBITDAR margin to moderate to 37% by FY20

RATING SENSITIVITIES

The resolution of the RWN will depend on the details of DIST's capital structure, which could take longer than the typical six month period if its plans are delayed. This will also be dependent on the plans obtaining the necessary approvals from the shareholders and SEC.

Negative: The Negative Watch could result in a downgrade if DIST increases its financial leverage to meet its promissory note obligation. The rating may be downgraded by multiple notches if DIST adopts a more shareholder-friendly distribution policy to its new parent, MC.

Sri Lanka’s JKH launches 2nd luxury apartment block

ECONOMYNEXT – Sri Lanka’s John Keells Holdings group said it plans to build a second high-rise luxury apartment block after the success of the first one, half of whose floor space has already been sold.

Pre-bookings for ‘The Suites at Cinnamon Life’, the second residential tower to be built as part of a 4.5 million square foot integrated resort by JKH unit Waterfront Properties (Private) Limited, have exceeded 15%, a statement said.

The 196 apartments in the second residential tower, which will rise 39 stories to a height of 136 meters, are priced at US$400,000 upwards.

Construction of the US$850 million integrated resort project is by a consortium of contractors headed by Hyundai Engineering and Construction.

It includes an 800-room luxury Cinnamon hotel, a shopping and entertainment mall, office spaces, food and beverage outlets, ballroom, and conferencing, theatre and banqueting spaces with capacity for 5,000 people designed to cater to MICE (Meetings, Incentives, Conferences, and Events) tourism.

Suresh Rajendra, President, Property Sector of JKH, said the project is scheduled for completion in the latter part of 2019 and will be operational in early 2020.

Roshani Moraes, Executive Vice President, Property Sector of JKH, said over 50% of the floor space of the first residential tower ‘The Residence at Cinnamon Life’ has already been sold.

“Given our success with the first tower, we decided on the second tower,” she told a news conference.

“It’s almost like an investment tower. The two-bed roomed apartments will have the greatest demand for rental purposes. Apartments in our older properties have outperformed the market in rental returns and capital appreciation.”
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Other properties of JKH’s property arm include the Monarch and Emperor at Crescat City; Onthree20; and its latest completed project, 7th Sense - Gregory’s Road.

Moraes said a 30-storey office tower is also planned which could be an investment instrument.

“We are offering investment opportunities in the commercial space, which thus far have been available only on a rental basis with the exception of one or two floors in other developments,” she said.

Krishan Balendra, President of JKH’s Leisure Sector, said the integrated facility will have the largest banqueting and conferencing facility in Colombo with the group targeting the MICE market.

“We running two five-start hotels – Cinnamon Grand and Cinnamon Lakeside and we know we don’t have conferencing and entertainment facilities for regional conferences or even very big weddings, for instance from India.”

Monetary Policy Review – September 2016 - Policy rates unchanged

According to the Department of Census and Statistics (DCS), the Sri Lankan economy is provisionally estimated to have grown by 2.6 per cent, year-on-year, during the second quarter of 2016 compared to the growth of 7.0 per cent recorded in the same period of 2015. Meanwhile, growth in the first quarter 2016 was revised to 5.2 per cent.

In the second quarter of 2016, Services related activities grew by 4.9 per cent while Industry related activities recorded a moderate expansion of 2.2 per cent. Agriculture related activities, which were affected by adverse weather conditions, recorded a contraction of 5.6 per cent in the second quarter of the year. A combination of improvements in the Purchasing Managers’ Index (PMI) and business confidence as well as favourable base effects in the fourth quarter of 2016 are expected to contribute to a rebounding of growth in the second half of the year.

On the external front, the deficit in the trade account expanded marginally by 0.7 per cent, year-on-year, during the first seven months of 2016 as the decline in export earnings was greater than the contraction in the expenditure on imports. Strengthening the external position, earnings from tourism increased by an estimated 16.0 per cent during the first eight months of the year, while workers’ remittances increased by 4.5 per cent during January-July 2016. In addition to the confidence gained from the Extended Fund Facility of the International Monetary Fund (IMF-EFF), increased investment inflows on account of government securities as well as other financial flows to the government helped to stabilise the domestic foreign exchange market. Reflecting these developments, gross official reserves were estimated to have improved to US dollars 6.6 billion by end August 2016, while the Sri Lankan rupee has recorded a marginal depreciation thus far during 2016.

Reflecting the normalisation of domestic supply conditions as well as the suspension of the implementation of certain changes to government tax policy, inflation declined further in August 2016, on a year-on-year basis. Core inflation also moderated on a year-on-year basis, reflecting the impact of the latter effect.

In the monetary sector, broad money expansion continued to remain high at 17.8 per cent in July 2016, on a year-on-year basis, compared to 17.0 per cent recorded in the previous month. The expansion in monetary aggregates was mainly driven by credit flows to the private sector and the government from the banking system, while credit to public corporations continued to contract during the month. The growth of credit granted to the private sector by commercial banks was at 28.5 per cent, year-on-year, in July 2016, compared to 28.2 per cent in the previous month. Market interest rates, which increased in response to monetary tightening measures of the Central Bank, are expected to slow down credit expansion in the months ahead.

Considering the above developments, the Monetary Board, at its meeting held on 27 September 2016, was of the view that adequate measures are currently in place to contain monetary expansion at levels supportive of maintaining the macroeconomic balance while facilitating economic activity. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively.


Sri Lankan shares post 3-wk closing high as banks gain on rate decision

Reuters: Sri Lankan stocks closed higher on Wednesday, hitting a more than three-week closing high, led by gains in banking stocks after the central bank held the key monetary policy rates steady.

The central bank's widely expected decision earlier on Wednesday to hold the rates steady suggested that policy makers were keen to support a slowing economy even as they kept a tight leash on rampant credit growth.

Treasury bill yields fell for the second session at Wednesday's auction. They fell between 16-33 basis points.

Analysts said they expected the stock index to rise this week due to the fall in the return on fixed income assets.

The bank has tightened policy three times since December.

The benchmark index of the Colombo Stock Exchange ended 0.45 percent, or 29.03 points, up at 6,512.32, its highest close since Sept.6.

After four straight weekly losses, the index had posted a weekly gain of 0.10 percent last week.

"Investors are in a positive mood and sentiment is slowly improving with foreign buying," said Dimantha Mathew, head of research at First Capital Equities (Pvt) Ltd.

"Holding rates is just another confidence booster at a time the market has had a turnaround."

Foreign investors bought a net 73.2 million rupees worth of shares on Wednesday. But they have been net sellers of 2.96 billion rupees worth of equities so far this year.

Turnover stood at 1.05 billion rupees, well above this year's daily average of 754.7 million rupees.

Shares in biggest listed lender Commercial Bank of Ceylon Plc rose 1.4 percent while conglomerate John Keells Holdings Plc rose 0.59 percent. 

($1 = 146.0000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Amrutha Gayathri)