While the minutes ticked by, the group in the conference room waited for news from the other end of the world; from the capital markets of Singapore that were opening for business as New York wound down for the night. News from Singapore would be the omen for ‘bullets or bouquets,’ when they returned home, to Colombo.
“Singapore was the litmus test. It was the indicator for other markets. So we were all waiting for Singapore to react,” says P A Lionel, the head of Bank of Ceylon’s International, Treasury and Investment Division. Also in New York was BoC Chairman, Gamini Wickramasinghe, then General Manager, W A Nalini, Assistant General Manager of BoC’s Treasury Division, Sarath Jayasuriya, and Chief Financial Officer, Asoka Rupasinghe.
“At that point the pressure was terrible. We had been flying, literally across the globe, getting maybe, two hours of sleep every 24 hours. If we had made the wrong call, got this one little number wrong, we would have had to face a torrent of blame when we came back home,” was how a now pleased Rupasinghe explained the behind the scene tensions on the eve of BoC’s maiden international bond issue, on April 26, 2012.
Rupasinghe, had staked his reputation on the project as a financial expert with global exposure. He had made a name for himself in the banking industry in Qatar, as the Head of Corporate Financial Affairs at the Commercial Bank of Qatar, where he was involved in Euro-dollar bond offerings by the bank. However Rupasinghe is fiercely proud of his rural Sri Lankan origins. He returned to Sri Lanka after the end of the conflict “to do my part for the country,” he says, and joined BoC where he helped articulate the vision for a one trillion rupee balance sheet. Rupasinghe, due to his exposure to international capital markets, was also expected to support BoC’s drive to generate international funding. If BoC’s maiden international bond issue generated anything less than “the best deal,” it would have meant a reputational slur hard to live down.
The worst moment, says Rupasinghe, was pinning down the right number, as an indicative rate for the bond. “If we got that number wrong, the financial market here, the government, companies and trade unions, would have blamed us. They would have said we went in like big shots but didn’t know how to negotiate with international players. But the thing is, we didn’t even have a benchmark to go by, because this was the benchmark. We had next to no direction on setting this number, because this was a first time thing,” says Rupasinghe.
BoC’s Chief Risk Officer at that time, Trevine Fernandopulle, put the dilemma in context. “We had to get the price right, because when we lend to the local market the interest rate must be bearable for our people. If not, it will make our exports and production uncompetitive. But at that point, countries like Spain and Greece, were willing to pay higher rates than us.”
BoC also had to offer higher returns to investors than the Sovereign’s rate and also compete against other foreign bond issues also taking the market floors on the same days, but at the same time had to quote low enough to be affordable for local consumers and businesses. The international rating of the bond, by Fitch and Moody’s, while being the best that could be expected, did not exactly auger plain sailing either. BoC’s bond could not be rated higher than Sri Lanka’s sovereign rating. So the outcome was what is known as a ‘junk bond’ rating in investment lingo. Moody’s gave the bond a B1 with a stable outlook, while Fitch gave it a BB- with a stable outlook. Both ratings fall within the non-investment or speculative grade. Also, although BoC is top dog in Sri Lanka’s financial sector, it was an unknown entity outside the country. So, responses from potential investors during the road show were the only pointers, to set the indicative rate to debut the bond.
After hours of wrangling among each other and with the bond’s lead managers, HSBC, Citi Bank and Bank of America and Meryl Lynch, the BoC team had only a few hours prior to Singapore’s financial markets opening to agree on the indicative rate of 7.125, for its US$ 500 million bond. If the rate was too low, the bond would fall flat.
But the news from Singapore was even better than what the hard core lead managers had expected. Hong Kong, London, Boston, LA and finally New York, fell over its collective feet queuing up to buy. “I think, we were oversubscribed by the time we closed in London. So by the time we closed in New York, we were over 7 times oversubscribed,” says Lionel who is usually a composed person but now gleeful.
This gave BoC the leverage to push down the price and the five year bond closed at an interest rate of 6.875%. The previous benchmarks for international debt were set mainly by the government. The first sovereign bond in 2007, for 5-years, went at 8.25%. The second, in 2009, also for five years, sold at 7.40%. The third in 2010 and the forth in 2011, both for 10-years, went at 6.25%. “Normally, investors would add 1.5% to 2.0% to the sovereign rate, but because we were so heavily oversubscribed, we had the space to negotiate the rates down. Most of the bids were in the range of 7.0 to 7.125, but we had bids as low as 6.875. That is how we got the really good rate of 6.875 for our bond,” says Jayasuriya.
Much of the takers for the BoC bond, around 80%, were global hedge funds, looking to park small amounts in new destinations, away from volatile Europe and slow moving US. There was also strong interest from the Middle East. Through the process the bank also built an international network of potential future customers. “The investment banks have clients to whom they give preference. So one of the key learnings from this exercise for us, was establishing contacts outside the investors shortlisted for us by the investment banks. For instance, one Arab investor had asked for US$ 100 million but he was not selected. But we decided to allocate US$ 10 million for him. We did this with many other applicants as well, and we hope to establish contact with them later, at a bilateral level,” says Rupasinghe.
The enthusiastic reaction to the BoC bond indicated that international markets now saw opportunities inside Sri Lanka and were willing to invest. “The government, central bank, other financial institutions and companies, were watching to see what would happen to our bond issue. So I think the market reaction showed there is enough capacity for Sri Lankan companies to raise funds outside the country,” says Jayasuriya.
Within weeks of BoC’s bond, the government too, went international for another US$ 1 billion. Sri Lanka’s fifth sovereign bond, for US$ 1.0 billion, for 10-years, was snapped up at 5.875% per annum, 10 times oversubscribed, in July, showing a trend of lowering rates. Again in July, People’s Leasing Company Plc, Sri Lanka’s largest leasing company and a subsidiary of the state-owned People’s Bank, announced plans to raise US$ 150 million through an Euro-dollar bond. The Sri Lanka Ports Authority has also said it would go for a U$ 1 billion bond, sometime in October, to expand port facilities and pay off Chinese loans.
Demand for dollars
Controlling nearly a third of the country’s banking assets, BoC is cash rich – in rupees. What it needed was the foreign currency, to meet dollar demand that had shot through the roof since the end of war. The bond was part of the bank’s funding strategy to make sure there was enough foreign exchange to support post-war development. “Demand for dollars boomed after the war. We had anticipated a demand growth but when it came, it was much bigger than we expected. But we also couldn’t afford to depend on local money markets for funding,” says Fernandopulle, who has since the successful bond debut, shifted to DFCC.
Faced with the spike in dollar demand and also a risk of petroleum prices rising in the future, due to instability in the Middle East, BoC’s Asset and Liability Management Committee and the Treasury, the main shareholder of the bank, were discussing alternate funding sources, as far back as 2009. The decision to go for an international bond issue was taken at least one year ahead with government blessings. According to BoC’s Chairman, Gamini Wickramasinghe much of the US$ 500 million will go to support imports, particularly petroleum imports. “The petroleum guys are mainly banking with us. So we are talking millions of dollars here, and we need to find those dollars. Out of this money, a section will be put aside to address petroleum import financing.”
BoC’s dollar lending to local businesses has also expanded and now accounts for about 30% of its total lending. The bank says local exports and tourism companies prefer dollar borrowing as a hedge against exchange rate fluctuations. “Companies, for instance, tourism companies, ask for dollar loans because they also get dollar incomes. So we have a steady demand for dollar loans in the range of US$ 30 million – US$ 50 million. This year maybe more than 40% of our lending might be in foreign currency,” says Wickramasinghe.
But it wasn’t just domestic dollar demand that prompted BoC’s international bond. Part of the reason was BoC’s long term plan to expand beyond Sri Lankan shores. “We wanted to introduce BoC to the international market. We wanted to establish contact with investors, hedge funds, private banks and high net worth people, because we are now in the process of expanding our international operations. We want to make BoC an international bank,” says the head of BoC’s international activities, Lionel. The bank, which already controls around 33% of total foreign currency in Sri Lanka, plans to expand into Europe using its current UK office. “The plan is to enter the EU, under our UK licence. We may have to strengthen BoC UK with some additional capital but we can then open branches in strategic European locations,” says Lionel.
Expansion into other countries, particularly high inward remittance destinations, will initially be through exchange houses or representatives. Already nearly half (47%) of the inward remittances coming into Sri Lanka, through formal channels, are estimated to come via BoC. Now the bank is actively gunning for the estimated 25% flowing in via the hawala system. “Through BoC UK and expansion into Europe, we will tap inward remittances from the UK, Italy and France. Initially, we will open exchange houses or set up representatives. Within the next two years we will do the same in Canada, Cyprus and Australia, in addition to our existing representatives in the Middle East, South Korea and Israel,” said Lionel.
Through the five year bond, BoC was also looking to strengthen its balance sheet by increasing its long term borrowings, to balance a lending-borrowing maturity mismatch. BoC’s Chairman Wickramasinghe says the bank may go before international markets again, within the year, depending on demand. But right now, the bank seems to have satiated its thirst for dollars. This has given a merciful respite for the over stretched bond team. As Rupasinghe, BoC’s head number cruncher explains the behind the scene status of the bond, “The amount of work we had to put in, to meet that one bond issue on the deadline, no one will believe.”
Paper mountains and minefields of lawyers
As Trevin Fernandopulle, puts it, “We had to work against time.” The bank had a window of 135 days from year end, to close the deal. This included meeting the strenuous due diligence requirements, aligning local systems and agencies, accommodating rating agencies, international investment banks and investors, and also negotiating with lawyers. If it missed the May 14th deadline to close the deal, the entire process had to be reworked again.
Most of the burden was paper work, but this is what gave BoC officials sleepless nights.
“The formats and templates are all there. You just need to follow the process and do the documentation the way they have stipulated. But they are very, very sharp. The lawyers, analysts and specialists go through every word, every number, with a fine tooth comb. They also go through the historical records of the country and the company,” says Rupasinghe who pulled together a team to work the mountain of paperwork and to navigate the ocean of numbers that had to be channelled into the paperwork. This meant a culture change at BoC where the 9 to 5 work hours were abandoned and Rupasinghe’s staff worked furiously, almost around the clock, for weeks. While this was happening, in March, the bank also obtained international credit ratings from Fitch and Moody’s.
Then the analysts and lawyers descended. Together they were a mine field that could have stopped the show before it started. Junior staff attending meetings were given strict instructions to “keep quiet and answer only if we looked at them and then only to the point.” But explosive moments popped up when least expected.
“One day, we had an entire group of international lawyers here for a background brief. So there we were telling them how peaceful the country is, and how well the economy is recovering, and our own trade unions decided to hold a protest,” recalls Rupasinghe.
The very public protest, blocking the front entrance of the bank’s headquarters in Colombo’s financial centre, could not be kept under wraps for long. By mid-day the unions were in full strength shouting slogans and demands, waving placards and causing a traffic jam. The visiting lawyers had to be taken to the Hilton, a few blocks away for lunch. But that would mean a head on meeting with the raucous unions. Faced with this unexpected disruption to their carefully crafted meeting, the bank’s senior officials, were left cracking their brains for a by-pass strategy.
“In the end we took the whole group of lawyers, right through the protest, and told them our trade unions were holding an educational event for their members. Fortunately the trade unions were yelling in Sinhala and none of the lawyers could understand Sinhala,” says Rupasinghe laughing.
Right in the thick of things, communication suddenly became a serious problem too. The range of different accents, emanating from an army of analysts and lawyers from different parts of the globe nearly created a Tower of Babel. “To start with, most of the staff had no idea about the processes and procedures of an international bond issue. On top of that, with lawyers and analysts coming from different parts of the world, it became almost impossible to get a handle on things at some meetings because of the range of different accents. They were all talking English but some people had such thick accents, most of our junior staff could not understand them at all. So they kept getting lost at meetings and didn’t understand what was expected of them and what information they were supposed to supply to these people,” recalls Rupasinghe.
At one point, junior staff ignored an urgent document because they had no idea what it was. “The lawyers had sent what is called a ‘circle document,’ where they had marked out or circled specific areas. The document was lying around for a week or so, until I checked on it, because the junior staff did not know what it was, and what they were supposed to do with it. So that delay cost us a week when we were already pressed for time,” says Rupasinghe now amused about one of the many challenges. The learning curve of tapping international markets extended beyond the bank and into other government agencies as well.
The bank had to rope in the Auditor General (AG) to issue a ‘letter of Comfort’ certifying its painstakingly assembled numbers. This meant convincing the AG’s office to go beyond its statutory obligations and introducing the AG’s office to the required procedures. Sometimes, the bank also had to talk the AG’s office into working well beyond normal work hours. International legal experts and investors meanwhile, had to be convinced to accept the AGs certification. “The usual process is to get one of the big five audit firms to certify the numbers. But we went to our AG instead. We were lucky again, because the AG understood what was required and agreed to help us and this helped cut our costs. The difficult part was convincing the international lawyers. They maintained it was unethical to get the AG to certify us, because we are a government bank and the AG is also a government institution. We had to argue that the AG is not part of the government and is an independent body.”
In between these legalities and negotiations, the lead managers squeezed in mock meetings for key BoC staff. “The idea was to prepare us for the investors and rating agencies. They let us know what type of questions would be asked and how we should respond. This was very useful because even though we had not done this before, we didn’t go in blind. We knew what to expect and we were ready for the questions fired at us” says Rupasinghe. Finally, the Offering Circular (OC), also known as the investor’s bible or the prospectus, was ready to print (it was still not printed when the team left Colombo to start the road show from Singapore, and the printing had to be shifted from Hong Kong to Singapore), and BoC was set to woo international markets.
Around the world in 11 days
The road show saw BoC officials doing fire drill presentations to over 70 prospective investors in 6 cities, across the globe, in 11 days. The bank did not hire a separate company to organise its road show, depending instead, on its lead managers to coordinate it. Not having a third party organise the road shows cut the cost of the bond issue. “The organising was so good the whole thing went like clockwork. I think we can confidently say we got the best advice and expertise from our lead manager,” says Lionel recalling days at meetings and nights inside airports with a few hours of sleep snatched in between.
Now, with a successful international bond issue under its belt strengthening its balance sheet and marking its international presence, BoC is gearing for its global expansion. But the pressure is still on. Local financial markets and businesses are watching closely to take their cue from the market leader. So how BoC deploys its dollar borrowings in the face of political considerations and how well BoC continues to navigate the quick currents of international financial markets, will influence the entire financial sector of Sri Lanka.