Perpetual Treasuries shields Rs. 15 billion bond bid

• Says Debt Department asked PTL if it was interested in 30-year bond
• Says CB was desperate for funds
• Govt’s desperation led to confidence in bidding high: PTL
• Insists PTL could have raised enough capital

By Himal Kotelawala

Perpetual Treasuries yesterday defended its decision to bid up to Rs. 15 billion at the controversial February 2015 bond auction on the assumption the Government was “desperate” for funds and that it acted in response to an inquiry by the Central Bank to participate in the auction.  

Apart from some Rs. 300 billion worth of government liabilities, one of the reasons for this assumption, according to the primary dealer, was that the Public Debt Department (PDD) of the Central Bank had uncharacteristically asked PTL if it had a buying appetite for a 30-year bond.

Testifying before the Presidential Commission of Inquiry (CoI), Perpetual Treasuries Ltd. (PTL) CEO Kasun Palisena said that the PDD had “canvassed” for funding, claiming that a PDD official by the name of Gunatillake had called him on 26 February 2015, the day after the bond issuance was announced, asking him if PTL might be interested in buying a longer term bond.

In his testimony, Palisena said that he expressed his interest, provided the yield was right. Gunatilleke had suggested a rate of around 9.35%, to which Palisena had responded that it was too low for that maturity. Upon being questioned by Commissioner Prasanna Jayawardena of the CoI, Palisena said a reasonable rate in February 2015 should have been “anything above 11.5%.”

In the past, primary dealers had to call the Central Bank (CB) to ask for prior placements but this time, said Palisena, the CB had called a primary dealer asking if they had a buying appetite for a longer tenure bond, leading him to believe the CB was “desperate for funds.”

The Government also had Rs. 300 billion worth of liabilities, he said, adding that the call from the PDD had confirmed his assumption about the CB’s financial status.

When asked for clarification on how PTL had arrived at this Rs. 300 billion figure, Palisena said that including coupons payments for bonds issued earlier totalled Rs. 212 billion without raising a single bond. The International Monetary Fund (IMF) tranche repayment, a Rs. 500 million sovereign bond issue and the Government’s mini-budget (which included a Rs. 10,000 increment to state sector employees) led PTL to believe the Government needed to raise at least Rs. 300 billion.

 Commissioner Jayawardena grilled Palisena on what led PTL to confidently bid for nearly 15 times the amount the CB had offered and expect that their bid would even be accepted.

Recapping the facts at hand, Commissioner Jayawardena said that the company’s holdings had dropped to Rs. 2.8 billion by the end of 2014 and as at 31 January 2015, its Treasury bond and Treasury bill holding was only Rs. 3.5 billion. Under those circumstances, he asked, what could have prompted the company to bid as much as Rs. 13 billion on 27 February.

 Palisena responded that by July 2014, the company had gone up to Rs. 11 billion due to its capital size, to which the commissioner said the bid for Rs. 13 billion was still unusual given the company’s track record, pointing out that by 31 January 2015 the company’s total capital was only Rs. 1.04 billion.

 Palisena maintained that he knew that the Government needed to raise Rs. 300 million due to the reasons mentioned above and that PTL could have held a maximum of Rs. 15 billion (as opposed to the widely reported Rs. 13 billion).

The commissioner questioned the wisdom of bidding 12.5 times that of the company’s capital of just Rs. 1.04 billion for a 30-year bond.

Palisena explained that his company wanted to specialise in longer term bonds, adding that this was the reason it had considered adding a premium for its risk appetite. However, he was unable to provide an instance of PTL having bid more than five to seven times the amount offered in the past.

 When the Commission pointed out that PTL’s capital was not enough to accommodate the bid, Palisena insisted that it was sufficient, pointing to a “sell and buy” mechanism that he said was prevalent in the market at the time.

Commissioner Jayawardena countered that regardless PTL was still constrained by its capital strength and equity, highlighting its assets (Rs. 1.5 billion cash in hand and Rs. 3 billion if security below one year is counted as readily available cash), and pointing out it was still not enough to meet the Rs. 13 billion requirement. He also argued that auctions had not been that frequent in the past either, with direct placements continuing as the standard practice (80% to 90% of funds were raised through direct placements) and considering only Rs. 1 billion had been offered (this was the pattern over the past few years).

Palisena explained that he would have gone for sell and buy back options with at least three investment banks and two other primary dealers.

He denied that he had discussed it with these entities prior to 27 February. 

Upon further questioning, Palisena identified these companies as NDB Wealth Management, Bank of Ceylon, Wealth Trust, DFCC and First Capital.

Pressing him further, Commissioner Jayawardana said PTL still did not have the liquid cash, to which Palisena said he had Rs. 3 billion “as good as cash” and Rs. 580 million coming in as maturity. This back and forth continued, with Palisena reiterating his claim that he had known the Government was desperate as there was no auction from December 2014 to January 2015.