Good early demand for BOC’s historic $ 500 m bond

The historic $ 500 million five year bond of the Bank of Ceylon (BOC) which opened yesterday had drawn good early demand, according to analysts.

Sources said that all Sri Lankan sovereign bonds so far had been quickly snapped up and the same appetite was likely for the BOC’s issue, which is also the country’s biggest-ever corporate bond.

Rated B1 by Moody’s and BB- by Fitch, on par with Sri Lanka sovereign, the five-year bond’s price guidance is 7.125% area, which analysts and economists said was better than expected.

Sri Lanka’s five-year bond is trading at around 5% and expectations are that BOC paper will be slightly above as the rate looks more generous versus other emerging markets.

The joint book runners are Bank of America Merrill Lynch, Citigroup, and HSBC. Bank of Ceylon is rated B1 Stable by Moody’s and BB- Stable by Fitch as well.

Analysts anticipate the bond to be snapped up at a range of 6-7% depending on the degree of demand. UNP MP Dr. Harsha de Silva on Wednesday said that a higher rate on BOC bond may push up the cost for a future fund raising exercise by the Government, whose 10-year bond matures later this year and a rollover was likely.

However, successful conclusion will help ease pressure on the exchange rate, which has been volatile during the past two days.

Analysts said if proceeds are used to settle off immediate outstanding oil bills instead of boosting reserves and liquidity in the market, the pressure on the exchange rate may remain though moderately. The Central Bank however has been insistent that recent volatility was unwarranted and reserves were comfortable with more inflows expected including the $ 500 m bond of the BOC.

A Reuters report said the BOC bond would be the benchmark for Sri Lanka’s other corporates, which are expected to opt for similar fund raisings in the future.

The Sri Lanka Ports Authority has plans for a $ 500 million, 10-year bond in mid-2012.

Founded in 1939, BOC is the leading commercial bank in Sri Lanka in terms of total asset size, branch and ATM network size and total revenues. The bank has been wholly-owned since 1961 by the Government and has a significant role in providing credit for the economic development of Sri Lanka.

The bank has the largest market share in loans and advances to customers, customer deposits, inward remittances and Treasury operations. BOC is also the 17th strongest bank in Asia as per the Asian Banker magazine.

According to the joint book runners, among credit considerations for prospective investors of the BOC bond is BOC’s leading market position and strong franchise.

As of 31 December 2011, the bank was the largest licensed commercial bank in Sri Lanka in terms of total assets, loans and advances to customers and customer deposits, accounting for 22.8%, 21.3% and 21.2%, respectively, of the entire Sri Lankan banking sector. The bank is also a leader in inward remittances. As of 31 December 2011, the bank had a 43.5% market share of all worker remittances to Sri Lanka.

Another is the strong Governmental support and professional management: BOC has been wholly-owned by the Government since 1961. The bank has benefited from strong Governmental support over the past years, obtaining and retaining significant business, including deposits, from the Government and Government agencies and institutions.

The bank’s strong relationship with the Government is also evidenced by the key role it plays in development of the Sri Lankan economy as the Government regularly consults the bank as an advisor.

Book runners also emphasised the good asset quality of BOC: As reflected in its conservative risk management, the NPA ratio of 2.2% and has a loan loss provisioning and had an NPL coverage ratio of 59.3% as of 31 December 2011. 10% of overall loans portfolio attributed to the Government; 23% attributed to State-Owned Enterprises (on commercial terms) and 67% to retail and corporate clients.

Among other positives are: Good liquidity and stable funding sources – due to its large network and strong franchise and deposits accounts for a significant part of its funding needs; good operating performance – ROEE and ROAA in steady and strong growth; and sound capitalisation – the Group’s Tier 1 capital adequacy ratio and total capital adequacy ratio stood at 9.3% and 12.8%, respectively.

Among risks are BOC’s concentration of loans to Government and Government-related companies, which constitute about 32.7% of its total loans, and 21.9% of its total assets and larger portion of deposits are less than one year maturities.