15 November, 2018

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WikiLeaks: Bond Issue 2007; ‘UNP Will Not Be Able To Honour Repayment’ – Ranil Wrote To JP Morgan, Barclays & HSBC

“The CEO of HSBC in Sri Lanka discounted the UNP threat as ‘silly… political tub-thumping.’ He said there was no way a future UNP government would voluntarily default, and was confident that international markets would be unconcerned by the UNP position. Other international bank and credit rating agency reps gave Econoff the same assessment.” the US Embassy Colombo informed Washington.

Opposition leader Ranil Wickramasinghe listens to journalists during a National Council coalition party news conference in ColomboThe Colombo Telegraph found the related leaked cable from the WikiLeaks database. The unclassified cable discusesSri Lanka’s debut sovereign bond issue. The cable was written by the Ambassador Robert O. Blake on September 05, 2007.

The ambassador wrote; “The Government of Sri Lanka plans to issue the country’s first international sovereign bond, in hopes of raising $500 million to fund infrastructure projects. However, the main opposition United National Party has announced that a future UNP government would not honor the bonds, which it claims the country cannot afford. UNP reps told us that their effort to sink the bond issue is primarily political though — an effort to keep the government from being able to buy the continued loyalty of former UNP MPs who joined the government as ministers last January. While markets will likely correctly view the UNP threat as a political move that would never materialize, the timing of the pending bond issue appears to be as bad or worse as sixteen months ago, when the government shelved an earlier plan for a $1 billion sovereign bond issue. Sri Lanka has had little good news to reassure currently skittish international debt markets. Nevertheless, market watchers say that the relatively small bond issue will probably appeal to a sufficient number of international investors who remain interested in diversifying their holdings of high-yielding emerging market debt.

“The Central Bank of Sri Lanka, which will float the bond on behalf of the Government, has selected JP Morgan, Barclays Capital and HSBC as joint lead managers of the issue, from among twelve local and international banks that bid on the role. According to a senior Central Banker, the bank plans an October road show to financial centers like New York, London, Frankfurt, Singapore, and Hong Kong to publicize the planned bond issue.”

“The opposition United National Party has challenged the government’s plan to issue the bonds. UNP leader Ranil Wickremesinghe wrote to JP Morgan, Barclays, and HSBC August 24, stating that ‘the bond issue is in violation of the law’ and that the ‘a future Government formed by the United National Party will not be able to honour the repayment obligations under this bond issue.’ In the letters, Wickremesinghe charges that the government has not informed Parliament of its plans to issue the bonds; that interest payments on the bonds ‘will hamper the sustainability of Sri Lanka’s long-term programme for servicing its existing public debt repayments’; and that the bonds may contribute to corruption, since planned ‘major infrastructure projects… have all been funded by bilateral and multilateral’ lenders. Wickremesinghe sent similar letters to U.S. Securities and Exchange Commission Chairman Christopher Cox and to Cox’s UK equivalent, urging them to ‘consult with the banks concerned and bring to a halt the issuance of this sovereign bond.'” Ambassador Blake further wrote.

Read the cable below for further details;

UNCLAS SECTION 01 OF 03 COLOMBO 001218

SIPDIS

SENSITIVE

SIPDIS

STATE FOR SCA/INS AND EEB/IFD/ODF
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE
TREASURY FOR LESLIE HULL

E.O 12958: N/A
TAGS: ECON EINV EFIN KMCA CE

SUBJECT: SRI LANKA: GOVERNMENT REVIVES SOVEREIGN BOND ISSUE PLANS;
OPPOSITION SEEKS TO BLOCK

REF: A. 06 Colombo 550 B. Colombo 170

¶1. (SBU) Summary: The Government of Sri Lanka plans to issue the
country’s first international sovereign bond, in hopes of raising
$500 million to fund infrastructure projects. However, the main
opposition United National Party has announced that a future UNP
government would not honor the bonds, which it claims the country
cannot afford. UNP reps told us that their effort to sink the bond
issue is primarily political though — an effort to keep the
government from being able to buy the continued loyalty of former
UNP MPs who joined the government as ministers last January. While
markets will likely correctly view the UNP threat as a political
move that would never materialize, the timing of the pending bond
issue appears to be as bad or worse as sixteen months ago, when the
government shelved an earlier plan for a $1 billion sovereign bond
issue. Sri Lanka has had little good news to reassure currently
skittish international debt markets. Nevertheless, market watchers
say that the relatively small bond issue will probably appeal to a
sufficient number of international investors who remain interested
in diversifying their holdings of high-yielding emerging market
debt. End Summary.

$500 MILLION BOND TO FUND
INFRASTRUCTURE, “SET A BENCHMARK”
———————————

¶2. (U) The Government of Sri Lanka has revived plans for the
country’s first international sovereign bond issue. The government
seeks to raise $500 million, or more if demand is strong. The
government says it intends to invest the cash it raises in
infrastructure projects. It also expects the bonds to provide an
interest rate benchmark for private Sri Lankan companies seeking to
borrow in international capital markets. This is the second time
the government has prepared to tap international markets for a large
bond issue (ref A). In mid-2006 the government abandoned plans to
raise $1 billion when advisor Citibank judged that the resumption of
civil war made the timing inopportune.

¶3. (SBU) The Central Bank of Sri Lanka, which will float the bond on
behalf of the Government, has selected JP Morgan, Barclays Capital
and HSBC as joint lead managers of the issue, from among twelve
local and international banks that bid on the role. According to a
senior Central Banker, the bank plans an October road show to
financial centers like New York, London, Frankfurt, Singapore, and
Hong Kong to publicize the planned bond issue.

OPPOSITION SEEKS TO BLOCK THE BOND ISSUE
—————————————-

¶4. (U) The opposition United National Party has challenged the
government’s plan to issue the bonds. UNP leader Ranil
Wickremesinghe wrote to JP Morgan, Barclays, and HSBC August 24,
stating that “the bond issue is in violation of the law” and that
the “a future Government formed by the United National Party will
not be able to honour the repayment obligations under this bond
issue.” In the letters, Wickremesinghe charges that the government
has not informed Parliament of its plans to issue the bonds; that
interest payments on the bonds “will hamper the sustainability of
Sri Lanka’s long-term programme for servicing its existing public
debt repayments”; and that the bonds may contribute to corruption,
since planned “major infrastructure projects… have all been funded
by bilateral and multilateral” lenders. Wickremesinghe sent similar
letters to U.S. Securities and Exchange Commission Chairman
Christopher Cox and to Cox’s UK equivalent, urging them to “consult
with the banks concerned and bring to a halt the issuance of this
sovereign bond.”

¶5. (SBU) A UNP economic advisor told Econoff, however, that if given
the opportunity to do so in a future government, the party does not

COLOMBO 00001218 002 OF 003

in fact intend to default on the bonds. The move, he said, is
rather a political tactic in the UNP’s strategy to bring down the
Rajapaksa government. The UNP believes that, if it can block the
bond issue, it will be able to lure back former UNP members of
parliament who joined the Rajapaksa government as ministers in
January (ref B). Conversely, the UNP believes that if the bond goes
through, the government will be able to buy the continued support of
those MPs by allocating much of the cash to the ministries they
control. The advisor stuck with the UNP’s charge that the bond
issue would violate the law, saying that it would cause the
government’s total outstanding debt to exceed a maximum established
by Parliament. One of the UNP ministers who joined the SLFP in
January likewise told Ambassador that the UNP had made, but not
followed through on, a similar threat to block the partial
privatization of the national airline in the 1990s.

¶6. (SBU) The CEO of HSBC in Sri Lanka discounted the UNP threat as
“silly… political tub-thumping.” He said there was no way a
future UNP government would voluntarily default, and was confident
that international markets would be unconcerned by the UNP position.
Other international bank and credit rating agency reps gave Econoff
the same assessment. (The Colombo-based JP Morgan representative
told Econoff he could not comment on the impact of the UNP’s letter
to JP Morgan while his firm conducted due diligence preparations for
the bond issue.)

¶7. (SBU) As for the government’s legal right to proceed with the
bonds, the senior Central Banker told Econoff that in fact the
government had notified Parliament, in its November 2006 budget
proposal for 2007, that it planned “foreign borrowings up to one
billion dollars.” Finance Ministry and Central Bank officials told
EconFSN that Foreign Loans are covered under Sri Lanka’s Foreign
Loans Act and therefore do not need special parliamentary approval
and that debt levels under the Fiscal Management Responsibility Act
are only targets to improve transparency and accountability, not
binding limits.

S&P SAYS SRI LANKA CREDIT OUTLOOK “STABLE”
——————————————

¶8. (U) On August 9, Standard & Poor’s Ratings Services upgraded its
outlook on Sri Lanka’s credit ratings from “negative” to “stable.”
(According to S&P, a negative outlook is used to signal that the
rating may be lowered in the near future, whereas stable signals the
rating is unlikely to change.) S&P kept Sri Lanka’s long-term
foreign currency rating unchanged at B+, or four tiers below
investment grade. S&P attributed the improved outlook to “higher
tax collections, strengthening of fiscal and macroeconomic
coordination, elimination of fuel subsidies and revision of
electricity prices” and “the limited impact on the economy from the
renewed fighting.”

¶9. (SBU) The senior Central Banker told Econoff that JP Morgan had
been influential in the S&P outlook decision, both by helping the
Bank prepare for the S&P assessment and by convincing S&P during its
deliberations that the Sri Lankan economy was in fact holding
stable. According to the Central Banker, Citibank had not been as
helpful in preparing the bank for the April 2007 Fitch Ratings
assessment, which ended with Fitch keeping its outlook at
“negative.” The new local Citibank head acknowledged to Econoff
that JP Morgan had beaten Citibank on “customer service,” but
maintained that Citi would have been a better choice than JP Morgan,
Barclay’s or HSBC to lead the bond issue.

COMMENT: POLITICS ASIDE, TIMING FAR FROM OPTIMAL
——————————————— —

¶10. (SBU) Aside from its political agenda, the opposition seeks to
block this bond issue because it doubts the government will

COLOMBO 00001218 003 OF 003

productively invest the proceeds in infrastructure projects. This
is a valid concern on three levels. First, as the opposition fears,
the government may well use the funds to retain the loyalty of
ex-UNP ministers by permitting them to pursue pork-barrel projects.
Second, the government has said it intends to build infrastructure
even where there is not currently a market demand (like the
Weerawila airport), or which could be built more efficiently by the
private sector (like an expanded oil refinery at Sapagaskunda).
Third, the government is showing signs of being short on cash to
bridge an apparently growing fiscal deficit, so it will likely use
some of the bond funds for current, rather than capital,
expenditures.

¶11. (SBU) While markets will likely correctly view the UNP threat as
a political move that would never materialize, the timing of the
pending bond issue appears to be as bad or worse as sixteen months
ago, when the government shelved its earlier sovereign bond issue
plan. Aside from the S&P outlook returning to stable, Sri Lanka has
had little good news to reassure currently skittish international
debt markets. Nevertheless, market watchers say that the relatively
small bond issue will probably appeal to a sufficient number of
international investors who remain interested in diversifying their
holdings of high-yielding emerging market debt.
BLAKE

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Latest comments

  • 9
    16

    This can’t be the same Ranil who is now our un Elected PM…

    Because he is cool now, after awarding his mate’s son in Law 6500 Million worth of Bonds at 13 % interest fixed for 30 years.

    Unlesss the then Opposition leader had a vision that he may have the chance to hire his mates one day, and re negotiate the the Sovereign Bond also at 13 % instead of the lousy 8.25 % which Cabby gave the West.

  • 10
    3

    “¶6. (SBU) The CEO of HSBC in Sri Lanka discounted the UNP threat as”
    “silly… political tub-thumping.”
    The UNP had every right to oppose the sale and I am not surprised by ‘Ranil’s’ statement. HSBC, Barclays have messed things up for themselves, big-time. They should have known better. They were buying from a bunch of thieves who robbed the countries ‘Tsunami’ funds.

  • 5
    5

    Probably this is the only far sight wisdom the current PM will get it right. Interest based debt creates eventual death to all those who indulge in it. Governments consider the alternate method of financing productive growth driven by Islamic Shariah compliant investments.

  • 6
    11

    Honour is not a word one would associate with RW.

    • 4
      3

      So I suppose you would associate it with MR ????

  • 5
    2

    So now that you have vomited up every negative thing you can dig up to Slander the PM would you mind telling us what is in the report of the investigation into the CB bond issue fiasco. Don’t restrict your self to Raja Mahendran tell us about the goings on before he became governor. How were bond issues handled? How much money was raised? To whom were they sold? How come nothing was ever investigated before? Is this the gratitude you give to a man who has tried to govern fairly. This nation is a truly cursed place for one simple reason. No gratitude non what so ever. Always dwell on the negatives, refuse to admit anything positive.

  • 0
    0

    I whole heartedly support your comment Weera.
    The nation is a bunch of uneducated, illiterate, ungrateful souls.
    In fact nothing should be done for the betterment of the Country or the people.
    Memories are extremely short.
    People live on kassippu /ethanol and have partially or impartially blocked their brains.
    You can and never will get a good word from anyone about anyone in public office, who works for a pittance and is therefore compelled to rob as they too have to keep the home fires alight.
    The Country has a phobia against anyone trying to get a job done.
    Elected or not, we were all aware that if MS became President, RW would be been the PM.
    SO what’s the shok about it?
    Elected or not, it’s something the entire Country was aware of long before the election .
    He is the only decent , clean politician that we have.
    God save & protect him.
    The post of President was grandiose during the term of the Raja s.
    But now when we don’t have a president who can’t say ‘BOO TO A GOOSE, LET ALONE A GANDER’, we have to thank the almighty that we have a PM who is the kind of person we need to take this country forward, a Lee Kuan Yew

  • 1
    0

    People Like K Sumane needs to start with primary school math to understand the differences between now and then.

    First value, 500USD million is 65 Billion SLR, which is pretty much 1/13th of what offered this time. Even a little kid would understand the HUGE diff in the bond value and HUGE diff in the payments thats attached to it, do you Sumane ?

    Then, choice, Sumane can you dig into Cabarayas head and let us know why JP not, lets say, Goldman or Morgan Stanley or any other investment bank for that matter, was picked ? Was there any proper procedure in selecting the underwriter ?

    Next, Rate, Sumane just a little lesson for you on economics, when countries, esp developing countries issue bonds, they tend to give higher rates for the ones that are issues in local currencies, because they are not subject to huge FX market fluctuations so they carry low risks. But when they do in other currencies, like USD in this case rates tend to be in the lower side, esp. credit ratings of that country is good. Now, please let us know why Cabaraya thought 8% is a good value ? Are you aware that some other banks that were following this deal, thought this is a rip off, and SL could have gotten a better deal ?

    Funny thing is Sumane, Sri Lanka could have easily obtained this loan from IMF or ADB, or even from Japanese Government ODA, for a much lower rate. So why Cabaraya had to rush to JP Morgan to create this whole fiasco ?

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