Sri Lankan rupee at record low; stocks up from near 5-yr closing trough

Reuters: ** The Sri Lankan rupee hit a record low on Monday as banks and importers purchased the U.S. dollar, while stocks edge up from their nearly five-year closing low hit in the previous session.

** The rupee dropped 0.4 percent to an all-time low of 172.50 per dollar, surpassing its previous low of 171.80 hit on Friday, mainly due to importer demand for the greenback, market sources said.

** The rupee ended at 172.40/60 per dollar, compared with its previous close of 171.60/80.

** Sri Lanka has selected China Development Bank for an eight-year $1 billion syndicated loan, the South Asian country’s central bank said.

** The central bank surprised financial markets on Oct. 2 by leaving its key policy rates unchanged despite heavy pressure on the rupee and foreign outflows from government securities.

** The rupee has weakened 2 percent so far this month after a 4.7 percent drop in September against the dollar. It dropped 12.4 percent so far this year.

** The Colombo stock index ended 0.09 percent firmer at 5,766.00, edging up from its lowest close since Nov. 28, 2013 hit on Friday. It shed 3.6 percent last month, and lost 9.6 percent so far this year.

** Data from the central bank showed foreign investors sold government securities worth a net 5.3 billion rupees ($30.7 million) in the week ended Oct. 17. Sri Lanka has seen a net outflow of 85.9 billion rupees in securities so far this year.

** Stock market turnover was 214.1 million rupees ($1.24 million) on Monday, less than a third of this year’s daily average of 765 million rupees.

** Foreign investors were net sellers of 59.3 million rupees worth of shares on Monday, extending the year-to-date net foreign outflow to 9.1 billion rupees worth of equities.

($1 = 172.4000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez, Editing by Sherry Jacob-Phillips)

Sri Lanka's Lion Brewery regrets leaving Indian market

ECONOMYNEXT - Sri Lanka's Lion Brewery regrets leaving the Indian beer market to focus on its home market, a senior company official said, noting that many local firms are reluctant to risk venturing overseas and fear foreign competition.

Suresh Shah, Executive Director of the Lion Brewery (Ceylon) Ltd., said they understood the risks and complexities of the Indian market when they entered, but withdrew to give priority to investments to grow the home market, recovering after the ethnic war.

The Carson Cumberbatch controlled Lion Brewery withdrew from the Indian beer market in May 2011 having ventured into it in partnership with Carlsberg South Asia Pte Limited. It sold its stake to Carlsberg for 2.1 billion rupees.

“We know it is tough to do business in our region,” Shah told a World Bank forum to launch its new report on regional trade in South Asia which highlights the lack of intra-regional trade and investment.

“We understood the complexity of doing business in India. If we wanted the rewards of a very large market we had to face it. You go in knowing the risks and challenges,” Shah said.

Shah said they went into India knowing the alcohol business in India was extremely complex, more than elsewhere, and would take lot of money to succeed.

“Unfortunately, entering the Indian market involved a lot of cash upfront. We needed to expand capacity in Sri Lanka. So we took the call that we had to first protect the home market. That’s why we got out of it. We will regret it.”

Venturing into overseas markets required taking risks and staying power which many Sri Lankan firms appeared reluctant to do, Shah said.

He noted how global multinationals went into the big Chinese market although the Chinese governing system was very different to their own and markets also complex.

“Everyone who wanted to be big on a global scale are all in China,” Shah said. “A lot of them made losses and are still making losses.

“Nevertheless, they take that risk wanting to be known as global players. A lot of it is also in the mindset.”

Asked if it was apathy on the part of Sri Lanka’s private sector that so few had ventured overseas, Shah replied: “Of course it is. When you can make 100 rupees in Sri Lanka versus making 25 rupees somewhere else, 100 rupees is easy for the making here.

”If you want to take your business overseas you’ve got to be competitive and productive. Many Sri Lankan businesses are unfortunately neither productive nor competitive because we don’t face competition. Sri Lankan businesses need to be competitive for which we need to open our markets. We need to liberalise.”

Sri Lanka’s Nations Trust Bank gets US$50mn from Dutch lender

ECONOMYNEXT – Sri Lanka’s Nations Trust Bank (NTB) has for a syndicated loan of 50 million US dollars from FMO, a Dutch development agency, to support its business banking activities, mainly loans to small and medium enterprises.

A statement said FMO was able to blend tranches from commercial lenders and themselves to offer an overall facility with a five-year tenor that resulted in a maturity profile aligned well with the NTB’s needs.

“This syndicated transaction is FMO’s first repeat deal for Nations Trust Bank, following a subordinated loan which was provided eight years earlier to further the bank’s ambitious growth strategy,” it said.

Renuka Fernando, NTB Chief Executive Officer, said loan not only provided stable longer term funding to the bank but also opened doors to broad base funding options by establishing relationships with other commercial lenders some of whom are new to the Sri Lankan market.

The statement said the syndicated loan also enabled NTB to reach out to financiers such as Standard Chartered Bank, Abu Dhabi Commercial Bank, First Commercial Bank (Taiwan) and Atlantic Forfaitierungs, most of whom are lending to it for the first time.

FMO is known as Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. in Dutch or the Netherlands Development Finance Company.

Hayleys buys balance 9.47-stake in Singer Sri Lanka

ECONOMYNEXT - Hayleys Plc, has bought a remaining 9.47 percent stake in consumer durables retailer Singer Sri Lanka Plc, for 1,671 million rupees.

In September 2017, Hayleys bought control from Singer Sri Lanka for 10.8 billion rupees, in what was the largest trade in the Colombo Stock Exchange.

Hayleys, and its units Carbotels and Volanka bought a 61.73 percent stake at the time also for 47 rupees a share.

Retail Holdings NV, the previous parent had the option of selling remaining shares within the next 12 to 15 months.

Sri Lanka's rupee, which has an unstable soft-peg to the US dollar has fallen since then.

EPF needs governance overhaul, proxy advisor, to invest in Sri Lanka stock market

By a Member of the EPF

ECONOMYNEXT - Sri Lanka's Employees Provident Fund, a retirement fund of private sector workers managed by the state is about to re-enter the stock market, ending several years of inactivity after it came under fire for being a dumping ground for both stocks and bonds.

The EPF bought stocks at the height of a stock market bubble which peaked around 2011, earning the doubtful accolade of being the buyer of last resort in the stock market.

In 2015 and 2016 EPF dealers were involved in a bond fraud where they stayed away from direct auctions and bought bonds at higher prices from a company connected the then-Central Bank Governor's son-in-law.

Unlike 2011, stock valuations have hit rock bottom in 2018. This is without doubt a good time to enter the stock market.

But does the fund have the necessary skills and most importantly a robust governance structure to protect the interest of the EPF members? The answer is no, particularly on governance!

Mired in Conflicts

The EPF’s fund management is undertaken by the Central Bank under its Monetary Board, which is chaired by a Governor and several members including from the Treasury and private sector.

The members of the Monetary Board itself are riddled with multiple conflicts of interest. The Monetary Board is headed by the Governor, who amongst other things is responsible to raise money for the government by issuing Treasury bills and bonds.

In this role his objective is to raise money at the lowest possible interest cost to the government. EPF is one of, if not the largest, investor in government securities. The Treasury secretary itself is a member of the Monetary Board.

The EPF members' objective is to maximize the return on their funds.

How is this conflict managed by the Governor of the Central Bank? We can expect some ethical behavior from the incumbent Governor, but what will happen after he goes?

Other members are drawn from the private sector. The expansion of the Monetary Board from an earlier three members was supposed to reduce the concentration of power, bring in a private sector perspective and also bring balance by moderating the role of the Treasury.

But has this happened? There are concerns that non-ex-officio member have come with their own baggage adding further conflicts of interest to an already murky pot.

The current poor level of transparency of EPF’s activities is completely unacceptable. The EPF does not publish quarterly accounts in a timely manner, which can be accessed by members in the same way detailed annual reports are prepared by the large banks and financial institutions.

Only the 2016 annual report has been published in the EPF web site as of today.

The EPF does not hold annual meetings, where members could question the management and the Board (in this case the Monetary Board).

Way forward - A member’s suggestion on EPF reform

The way forward would be to re-organise the EPF in a way similar to pension funds in developed countries. It is understood that the Ministry of Labor has sought the assistance of the Asian Development Bank, to reform the EPF and a White Paper has been prepared.

However, this is not been shared with the EPF members despite requests made under the RTI Act to the Ministry of Labour & Trade Union Relations.

Why is the secrecy?

The secrecy could raise suspicions that interested persons are again trying to mis-use the EPF with elections close at hand. Already the Perpetual scam, where even government ministers have got housing benefits has created a negative perception among members and trade unions.

Competition - with transparency

A small portion of the EPF funds should be carved out and given to professional fund management firms to be managed under a transparent process under a proper investment mandate and a fund management agreement.

The fund managers should report their performance every month to ensure competition and transparency, similar to the current practice in the Unit Trust industry, where the performance is reported on a daily basis.

The performance of the professional fund managers can be used as a benchmark and bring in competition and professionalism into the current fund management process at the EPF.

Member Communications

The EPF should publish quarterly financial statements like any other listed company in Sri Lanka and have annual meeting for members.

Most global investment funds publish their holdings every month. A large international which bought rupee bonds for example use to publish their holdings every month. It is ironic that the EPF does not.

EPF should also publish their holdings of stocks every month, so that members can monitor changes. Unlisted stocks should be published separately.

This can be done for bonds.

Governance

The governance needs to be overhauled.

A separate Board should be established for the EPF, consisting of a majority of independent Directors representing the members rather than the interests of the Government of Sri Lanka.

The Directors should not have multiple conflicts of interest similar to the current situation.

Given recent developments, seeing person who are seen as friends of politicians being appointed as members of the monetary board does not inspire confidence.

Quite apart from being the Board responsible for EPF, it is not best practice for the central bank either.

A Presidential Commission of inquiry has already suggested that the Governor be appointed by the Constitutional Council.

The EPF Governing Board could also go through a similar process.

Proxy Advisors and EPF’s voting rights

In the past, the voting rights on the shares held by EPF have been used to appoint family and friends of the political leaders' as director of investee companies.

There has been not much difference under the current regime which came promising good governance.

The global best practice is for Pension Funds to use their voting rights based on the independent professional advice from proxy advisors.

Unfortunately, there are no such companies in Sri Lanka. But there are such companies in India already.

Institutional Investor Advisory Services India Limited (IIAS) is a proxy advisory firm, which provides Indian market with independent opinions, research and data on corporate governance issues as well as voting recommendations on shareholder resolutions.

Its shareholders include Axis Bank, Fitch Group Inc, HDFC, ICICI Prudential Life Insurance, Kotak Mahindra Bank, Tata Investment Corporation, UTI Asset Management Company Limited and Yes Bank. It is a registered research entity at the Securities and Exchange Board of India.

It provides voting recommendations for over 600 companies where there are large institutional holdings.

The EPF can get the services of a proxy advisor from India or some other country. Assistance could be sought from outside the country to set up a unit in Sri Lanka, the same way Fitch (then CBR) was set up in Sri Lanka to start ratging.

Such firms may help other institutional funds as well.

Conclusion

Fundamentally, EPF should invest in the equity market provide growth for its members, in fact it should have a larger proportion of the assets invested in the market, similar to the portfolio mix of pensions funds in other markets.

In some developed markets public pension funds also invest heavily in real estate. A study by Willis Towers Watson, actuaries found that equity forms more than 30 percent of assets of pension funds in major markets.

Graph

The EPF should be one of the largest shareholders in the country so that workers can have a share in the companies that drive growth

However, first has to put the policies, procedures, people and get the governance right. By improving transparency and publication of investments, an automatic check will be made against fraud and bad decisions.

In the current context, where the EPF membership does not have confidence in the management of the fund, the EPF needs to get its house in order, particularly governance, before embarking on yet another potentially disastrous adventure of investing in the stock market and bond trading.

Failure to do so will end up with the consequences being borne by the EPF members, who will see their retirement savings evaporate overnight.

As always the decision makers will escape scot-free without being held accountable, and will share in the spoils.

Sri Lanka new car registrations down 40-pct in September

ECONOMYNXT - Sri Lanka's new car registrations fell 40 percent to 4,990 units in September from a month earlier, and motor cycle registrations were down 25 percent to 23,914 units, amid import and credit controls, an analysis of vehicle registry data shows.

JB Securities, a Colombo-based brokerage, said overall vehicle registration were down 25 percent to 34,293 units in August and there were unsold vehicles with importers.

"There are yet a lot of inventory of unsold cars in yards or on the water thus one will not see a dramatic fall in registrations in the next 3-4 months until it is sold," the brokerage said in a note to clients.

"There are noticeable volumes in premium small engine cars due to a relatively lower rate of excise duty – these are entry level models."

Sri Lanka has cracked down on imports of cars amid policy errors by the central bank in liquidity management which has de-stabilized a soft peg with the US dollar.

Sri Lanka operates a highly unstable foreign reserve collecting soft-peg with the US dollar, involving a de facto external anchor with a shifting convertibility undertaking.

The regime suddenly shifts to a floating rate with a domestic anchor made up of a wide near-double-digit inflation target with unsterilized excess liquidity collected during the pegging period intact, sending the rupee sliding down forcing currency defence.

Money is then injected to sterilize the interventions and rates down, below the ceiling policy rate of 8.50 percent.

Term money is also injected at rates below the Sri Lanka Interbank Offered Rate for the tenor, which tends to keep swap rates down. Higher forward rates will encourage exporters to sell, analysts say.

Dollar for dollar, car imports tend to bring the highest revenues for the government. Falling car imports also hurt state revenues, forcing more borrowings and higher interest rates, which may require more money to be printed to keep rates down.

Sri Lanka bond yields edge down, rupee marginally weaker

ECNOMYNEXT - Sri Lanka's bond yields were lower Friday, and the rupee was slightly weaker in forex markets, dealers said.

The spot US dollar was quoted at around 171.55/75 to the US dollar in by mid-day, slightly lower from 171.30/50 levels a day earlier.

A 3-year 2021 bond was quoted around 10.75/80 Friday, up from Thursday's closing of 10.90/11.00 percent, dealers said.

A 5 year bond maturing in 2023 was quoted at 11.38/42 percent, down from 11.48/52 percent levels a day earlier.

Stock were down 0.12 percent by 12.45 hours Friday with the Colombo All Share Index at 5,771.6 points.

Sri Lanka Softlogic Holdings Plc upgraded to [SL] BBB+

ECONOMYNEXT - ICRA Lanka Lanka Limited, a rating agency said it had upgraded the credit of Sri Lanka's Softlogic Holdings Plc, to [SL] BBB+ from [SL] BBB with a stable outlook.

A rating watch had been removed.

ICRA said Softlogic had raised 3.1 billion rupees from a stock placement and another 3.9 billion rupees through a cash call on existing shareholders which had reduced leverage.

The full statement is reproduced below.

ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service has upgraded the issuer rating of Softlogic Holdings PLC (SHL/” the company”) to [SL] BBB+ (pronounced SL triple B plus) from [SL]BBB (pronounced SL triple B) and rating watch with developing implications has been removed. The outlook on the long term rating is ‘Stable’.

Rationale

The rating upgrade considers the improvement in capital structure of SHL subsequent to fund raising of LKR 3.1 billion during FY18 through a private placement and LKR 3.9 billion through a rights issue during Q1 FY2019, which resulted in the standalone gearing1 moderating from 2.3x as on March 31, 2017 to 1.4x as on March 31, 2018 and 0.9x as on June 30, 2018.

ICRA Lanka also takes note of the restructuring undertaken by the group of its retail operations, with the creation of a retail holding company under which fund raising for expansion purposes are envisaged.

The rating takes into account SHL’s position as the primary holding company of one of Sri Lanka’s leading conglomerates with several group entities holding leading market positions in sectors such as healthcare, financial services and retail. The group’s revenue had grown at a CAGR of 21% in the five years upto FY2018, aided by organic growth as well as several acquisitions.

ICRA Lanka also takes note of the experienced and competent management team at the holding company level and at various group companies; and SHL’s strong relationship with large financial institutions, proven access to capital markets, and liquid investment portfolio of LKR 1.6 Bn (at standalone company level), besides the company’s access to undrawn sanction lines of ~LKR 3.1 billion which provides comfort on the overall liquidity position.

The rating also factors in the substantial market buffer over the book value of SHL’s investments in quoted subsidiaries, however the comfort is mitigated to an extent due to a large portion of investments being pledged for funding facilities.

However, the rating is constrained by SHL’s high repayment obligations in the near to medium term and primary dependence on dividend income from subsidiaries, exposing it to risk of cash flow/dividend volatility from key sectors such as healthcare, retail and financial services and may require refinancing to meet its obligations.

Further, ICRA Lanka notes that the group has followed aggressive debt funded capex and acquisitions in the past and has high capex plans under the retail entity in the medium term.

This has resulted in the consolidated group having a stretched capital structure and coverage indicators, although with the recent fund raising the gearing has witnessed some moderation, though it remains at elevated levels. SHL has also periodically raised debt for acquisitions as well as to provide support to group entities for acquisitions, capex or for cashflow shortfalls, putting pressure on the capital structure.

Going forward, the ability of the group to raise capital at subsidiary level to meet capex requirements and improve profitability/divest loss making subsidiaries, such that there is limited funds requirement from SHL and loans extended by SHL to subsidiaries are gradually repaid, will be pivotal for improvement in the credit profile of SHL.

Outlook: Stable
ICRA Lanka expects SHL to get dividends from group entities, which have leading market positions in healthcare, financial services and retail segments and also benefit from flexibility enjoyed with lenders for any refinancing requirements, if needed.

ICRA Lanka expects gradual improvement in the capital structure of SHL. The outlook may be revised to ‘positive’ in case of better than expected dividends and repayment of debt to SHL from group entities, backed by improved financial performance or fund raising; leading to improvement in capital structure and coverage indicators of SHL, in conjunction with a resumption in Sri Lanka’s stalling macroeconomic position.

Conversely, in case of a significant weakening in the profitability levels of group entities leading to lower dividend payment and additional debt support requirement from SHL, resulting in stretched gearing and coverage indicators; the outlook may be revised to negative.

Key rating drivers

Credit strengths

Leading market position of group entities in several diverse sectors: Softlogic group is a conglomerate in Sri Lanka and has leading presence across several sectors such as healthcare (Asiri group), financial services (Softlogic Life Insurance and Softlogic Finance) and retail (Softlogic retail and Odel PLC). ICRA Lanka takes note of the long term growth potential of these segments, although they remain vulnerable to forex volatility, interest rate movements and changes in government policies.

Apart from the core sectors, the group also has presence in several other sectors including leisure, restaurants and automobile dealerships. The main source of income of SHL is dividends and payment for other services from group entities. The group has witnessed revenue growth at a CAGR of 21.1% during the five years upto FY2018, with topline of LKR 66 billion driven by organic growth as well as debt funded acquisitions.

Successful fund raising resulted in some improvement in capital structure: During FY2018, SHL had raised LKR 3.1 billion through a private placement and subsequently, it raised an additional LKR 3.9 billion through a rights issue during Q1 FY2019. This has resulted in moderation in gearing2 of SHL from 2.3x as on March 31, 2017 to 1.4x as on March 31, 2018 to 0.9x as on June 30, 2018.

ICRA Lanka also takes note of the restructuring of the retail segment, with the creation of a new retail holding entity under SHL, which will hold all retail companies. The management plans to fund the future capex requirements of the segment at subsidiary level and to repay some of the debt extended by SHL.

Experienced and professional management team: The promoter/group chairman who is one of the company’s founders is actively involved in business operations and provides strategic guidance to the group, while each of the core sectors is led by a professional management team.

Over the last few years, the group has inducted experienced industry professionals under key business segments, which is a positive.

Credit challenges

High repayment obligation of SHL in medium term; may need refinancing; SHL has availed loans to fund acquisitions as well as to extend support to group entities for debt funded acquisitions. This had previously put pressure on the capital structure, although same has witnessed some moderation in the recent period due to capital raised.

Nonetheless, SHL (standalone company) has high repayment obligations in the range of LKR 2.8 -3.0 billion per annum over next three years and is vulnerable to volatility in dividends/service income from group entities, which are its main income stream and in case of shortfall may need refinancing. However, the risk is partly mitigated by healthy financial flexibility enjoyed by the group with lenders as witnessed in the past.

Stretched capital structure and coverage indicators at group level; The group has been following rapid debt funded capex and acquisitions in the last few years leading to a stretched capital structure and coverage indicators.

The gearing3 of the consolidated entity was 3.2x (adjusted gearing4 4.5x) as on March 31, 2017 which moderated to 2.6x (adjusted gearing 3.4x) as on March 31, 2018 and 2.2x (adjusted gearing 2.7x) as on June 30, 2018, subsequent to fund raising.

With aggressive capex plans in the medium term, the capital structure and coverage indicators are expected to witness some pressure and any improvement will be dependent on the group’s ability to raise equity capital, improve profitability of its core operations and the ability to stabilize new projects. Further, any additional support requirements from SHL, may have an adverse impact on SHL’s credit profile.

Performance susceptible to broader economic cycle and changes in government policies; The group’s financial performance remains susceptible to the broader economic cycle, interest rate movements, forex volatility and changes in government policies.

Analytical approach: For arriving at the ratings, ICRA has applied its ratings methodologies as indicated below.

Company Profile:

Softlogic Holdings PLC (SHL /“the Company”) was founded in 1991 and was listed on the Colombo Stock Exchange in June 2011. The Company acts as the primary holding company for the Softlogic Group of entities with businesses across healthcare, financial services, retail, information and communication technology (ICT), leisure/hotels and automobile dealerships. The Group had a top line of LKR 66 Bn (LKR 59 Bn in FY2017) during FY2018 and has market leading positions in segments such as healthcare, financial services and retail. SHL was founded by the prominent Sri Lankan entrepreneur Mr. Ashok Pathirage, who has the controlling stake of the company.

On a consolidated basis, for the year ended March 31, 2018, SHL reported a PAT of LKR 2,278 Mn on a revenue of LKR 66,019 Mn vis-à-vis a PAT of LKR 920 Mn on a revenue of LKR 58,882 Mn during the previous fiscal. On a standalone basis, for the year ended March 31, 2018, SHL reported a PAT of LKR 3,699 Mn (inclusive of capital gains) on revenue of LKR 1,543 Mn vis-à-vis a PAT of LKR 1,025 Mn (inclusive of capital gains) on a revenue of LKR 1,972 Mn during the previous period fiscal.

Sri Lanka's Chemanex Plc, to exit closed export unit

ECONOMYNEXT - Sri Lanka's Chemanex Plc, said it was selling a 70 percent stak in an export unit for 20 million rupees to the other shareholders.

Chemanex said the unit, Cal Exports Lanka (Pvt) Ltd, will reduce its capital and from 42 million rupees to 18.7 million and return 9.2421 rupees per share on 2.52 million shares.

The firm was set up to manufacture industrial powder and adhesives.

The firm had said earlier, it was closing the business as it was found to be unviable.