CAPM spotlights debentures as long-term wealth strategy

Corporate Capital Market Ltd., hosted a webinar yesterday on ‘Debentures as a wealth strategy’ to educate uninitiated investors on how corporate debt instruments can provide steady income, protect against inflation, and diversify long-term portfolios.

The session featured Colombo Stock Exchange (CSE) CEO Designate Vindhya Jayasekera, NDB Investment Bank Chief Operating Officer Kaushini Laksumanage, and Nestor Stockbrokers Managing Director Nandun Jayatillake. Together, they mapped out the role of debentures in diversifying investment portfolios, the features of different types of instruments now available in Sri Lanka, and the practical steps for investors to participate in the market.

Jayasekera drew a distinction between saving and investing, stressing that households often focus on short-term goals through savings accounts or fixed deposits, which historically deliver returns below inflation. She noted that deposit rates over the past two decades averaged about 8% while inflation averaged closer to 9%. “If I can’t beat inflation, I won’t be able to maintain the same lifestyle after retirement,” she said.

She explained that debentures function as long-term loans raised by companies through the capital market, with investors becoming creditors entitled to periodic interest, known as coupons, until maturity. Unlike shareholders, debenture holders have no ownership rights but enjoy priority claims in the event of liquidation. Most listed debentures are issued at Rs. 100 per unit, pay fixed or floating coupons on a monthly, quarterly, semi-annual, or annual basis, and return principal at maturity.

According to Jayasekera, a comparison between fixed deposits and debentures illustrates their advantages. A five-year deposit at 10% yields an effective annual return of 8.45% if left untouched, while a comparable debenture paying semi-annual coupons allows investors to reinvest interim cash flows, producing higher overall returns. She pointed out that although both pay nominally 10%, the structure of debentures can generate more value.

Debentures listed on the CSE provide investors with the option to trade in the secondary market, although volumes remain low. They also carry minimum investment thresholds, generally Rs. 10,000, with higher minimums for Basel III–compliant instruments that banks issue to meet regulatory capital requirements. Investors, she said, must research issuers before committing, as debentures, though safer than equities, still carry credit risk.

Laksumanage built on these themes by outlining the range of debentures available in the market. Terms vary from two years to as long as fifteen years, and some perpetual debentures carry no redemption date, offering only coupon payments. Instruments may be senior or subordinated, with senior debentures paid before subordinated ones. Convertible debentures, often issued by banks, can be converted into equity under certain conditions, while non-convertible debentures remain debt until maturity.

She highlighted that Basel III debentures have become a common feature of bank funding since 2013, designed to strengthen Tier 2 capital. These must run for at least five years and carry regulatory provisions allowing forced conversion to equity if the issuer’s credit quality deteriorates. Although the option exists, no conversion has occurred to date.

Some debentures are guaranteed by banks or corporate parents, allowing issuers with weaker credit ratings to elevate the standing of their issues. Others may be secured against specific assets, though secured debentures are less common in the listed market.

Recent years have also brought innovation to the market. Green bonds are issued to finance projects in renewable energy or pollution reduction and require third-party verification of use of proceeds. Orange bonds are tied to gender equality and women’s empowerment, while blue bonds, not yet issued locally, would finance coastal conservation and water management. A Sharia-compliant Sukuk was introduced this year, structured to comply with Islamic finance rules by avoiding interest payments and instead offering returns based on asset-backed transactions. High-yield bonds, issued mostly by finance companies, offer elevated coupons but carry ratings ranging from BBB to C, reflecting higher default risk.

For investors, credit ratings remain a primary signal of repayment ability. Most investment-grade debentures in Sri Lanka fall between AAA and BBB. Instruments rated below BBB carry higher coupons but greater risk, requiring investors to weigh creditworthiness against potential returns.

Laksumanage also explained the regulatory roles underpinning the market. The CSE provides transparency by enforcing listing rules and disseminating information. The Securities and Exchange Commission oversees compliance with disclosure requirements and monitors for misconduct. The Central Bank supervises banks and finance companies, whose financial health influences their capacity to service debentures. The Central Depository System (CDS) maintains electronic records of ownership and facilitates coupon and principal payments directly to investor accounts.

She said the CDS structure ensures transparency and security, with settlements taking place on a T+1 or T+2 basis. Investors opening accounts must provide identification, proof of residence, and banking details, similar to standard know-your-customer procedures. Once opened, the account holds both equity and debt securities, allowing investors to view their portfolios in real time.

Jayatillake focused his remarks on how investors can enter the debenture market. He said participation begins with opening a CDS account through a licensed stockbroker, either via mobile app or in person. Applications for debentures during primary issues are lodged through brokers, and allotted securities are credited directly to the CDS account. Coupon payments are then remitted to the bank account linked to the CDS, alongside any dividends from equities if the investor also holds shares.

Investors who already have CDS accounts do not need to open new ones for debenture participation. Once debentures are credited, they can be held until maturity or sold earlier in the secondary market. The CSE provides a normal board, a crossing board for larger trades, and an over-the-counter for high-yield bonds. Settlement can be agreed on either a T+1 or T+2 basis.

Jayatillake pointed out that secondary trading gives investors flexibility. If market interest rates fall, debentures with higher coupons gain value and can be sold at a premium, generating capital gains. Conversely, investors who miss primary issues can still access securities later in the secondary market. He acknowledged that liquidity is thinner than in equities, but said the framework enables investors to exit positions before maturity if necessary.

He advised investors to consult licenced brokers or registered investment advisors, particularly when trading in the secondary market where timing and pricing require expertise. Brokers, he said, are equipped to guide clients on when to buy and sell, and to identify attractive opportunities based on credit ratings, tenors, and prevailing market yields.

Across the three presentations, the speakers underlined that debentures are not a substitute for short-term savings but a tool for building long-term wealth. They provide fixed and predictable cash flows, creditor protection in the event of issuer distress, and increasingly diverse structures aligned with sustainability and inclusion objectives. For issuers, debentures provide access to capital without relying solely on banks, while for investors they represent a middle ground between the lower yields of deposits and the volatility of equities.

As Jayasekera noted, “Debentures are great for long-term investments because they pay a fixed rate over a defined tenure, and you can reinvest and compound your returns.”