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The Sunday TimesBusiness

2nd March 1997




Foreign Capital Market tapped

By Asantha Sirimanne

The government is to raise US$ 50 mn (Rs. 2.8 bn) from international bond markets on a medium-term Floating Rate Note (FRN), The Sunday Times Business learns.

The note would mature in three years but would have a put option at the end of two years allowing investors to get their cash back if necessary.

International financial markets were expecting a governmental team to go on a road show in late February or early March.

Last Wednesday a top team led by Minister G. L. Peiris left the island for Hong Kong, Korea, the Gulf and Britain.

Though official statements only described the visit as an investment promotion effort, there was speculation that the trip was mainly intended to promote the note issue.

Neither Central Bank nor Treasury officials were available for comment on the FRN issue.

The issue is lead managed by Citicorp and ING Bearings.

Earlier the Bank of Ceylon had made an international float of FRNs at 1.75 per cent above the London Inter bank Offered Rate (LIBOR). However its second issue was priced lower, at 1.5 per cent.

The Bank of Ceylon is a state-owned institution which had already received government support to cover bad debts. With the government behind the Bank its risk could also be technically equated to government risk, analysts said.

However a sovereign issue should in theory be able to command a lower rate.

The note is also expected to be priced around 1.5 per cent above LIBOR though it could come down if the issue is oversubscribed.

It was also not unusual for pioneering issues to pay a premium. The three month LIBOR is currently around 5.5 per cent per annum.

Sri Lanka has no sovereign credit rating at present and the issue is expected to set the bench mark price for future international debt issues from Sri Lanka.

The issue is expected to open on March 10.

The FRNs are believed to be issued in denominations of US$ 1 mn.

Sri Lanka has an excellent record for debt repayment and a healthy debt service ratio which would help enhance the creditworthiness of the government, analysts said.

Compared to interest payments on rupee borrowings payments on foreign debt which is almost entirely (97 per cent in 1995) concessional loans are much less.

Interest payments on foreign loans which constituted 55 per cent of government debt totaled only Rs 6.12 bn in 1995 while Rs 13.9 was paid for T-Bills and Rs 18 bn was paid for rupee loans.

But rupee depreciation had added Rs 28 bn to the total foreign debt bringing the 1995 year end figure to Rs 345 mn.


By Business Bug
Cement producers stuck

Leading cement producers had earlier announced increases in production this year.

But now, most of them are reviewing that decision, we hear....

The reason is that the construction industry and the tourism sector, both major clients of the cement industry are unlikely to be able to sustain their previously expected growth rates.

Therefore, the demand for cement is expected to rise by about 15 to 20 per cent and not 40 to 50 per cent this year.

Ceiling on 5 star rooms

More about the tourist industry.

The decline in tourist arrivals in 1996, over 1995 was 25 per cent, due mostly to two bomb explosions in January and July.

Nothing untoward has happened yet this year, but everyone in the trade fears the slump to continue.

All this means cut-throat competition among existing hoteliers, even the five-stars. And that is why a ceiling on the number of five-star rooms is being proposed....

Amnesty deposits

The tax and forex amnesty that came into effect earlier this month is unearthing the hidden rupees.

But many "declarants" feel the requirement that money be deposited only in one savings bank is against the spirit of the amnesty, more so when interest rates offered by that bank are not the most attractive.

So, deposits may soon be allowed at two other state banks as well....

CEB's fuel bill of a staggering 16m. a day

By Shamindra Kulamannage

In desperate but costly effort to avert power cuts which buckled the economy last year, the CEB is spending a staggering Rs. 16.6 million a day to generate thermal power in addition to operating costs while the total fuel bill is reaching boiling point, an official said.

The total expenditure on fuel for the CEB thermal plants in December 1996 has been Rs. 474 million while in January 1997 it rocketted to Rs. 505 million he said. Thus CEB's annual expenditure on fuel might top Rs 6 billion in 1997.

Total revenue of the CEB for 1995 was Rs. 14,566 million (14.5 billion) of which Rs. 14,501 million came in the form of revenue from sales (billed electricity). The revenue for 1996 was estimated to have been around Rs. 15 billion.

It is yet to be seen how the CEB proposes to manage having to spend over Rs. 6 billion on fuel while spending on the maintenance of all its power plants, paying its workforce of over 14,000, incurring capital expenditure on the new power plants and expenditure on feasibility studies.

Further expenditure has been incurred on 83 MW of hired electricity, 43 MW from Aggreko, 20 MW from Koolair and a 20 MW gas turbine by the Wood Group. The Sunday Times learns that the CEB is spending an unprecedent amounts on these hired plants.

The CEB was however, not able to provide the exact figure.

About Rs. 26 million was released to BOI operators to purchase generators. The money released will be given as a grant which will be about 40% to the total cost of the generators imported. It is expected that about 80 MW generator capacity will be imported under this scheme. A similar grant of Rs. 150 million was also offered to non BOI enterprises to import generators. It is expected that a total of 50 MW of generators will be imported under this scheme.

The CEB also encouraged the private sector to import generators over 100 KVA by CEB paying the total customs duties and all other levies. The CEB advanced Rs. 200 million to DFCC and NDB to grant loans at a concessionary basis to those who wish to import generators over 100 KVA. One hundred percent of the Rs. 100 million given to DFCC was utilised while 90 percent of the allocation given to NDB was used. It is estimated that over 30 MW of generators were imported under this scheme.

Additional expenses such as subsidising generator imports and hired electricity coupled with the urgent need for more capital investments have put a severe strain on the CEB's revenue of Rs. 15 billion making the proposed tariff hike now inevitable.

CEB Chairman Arjun Deraniyagala admitted that the CEB's reserves were being affected due to the current power crisis. When confronted with the issue of the exorbitant cost of fuel Mr. Deraniyagala while admitting the cost, added that the CEB's reserves were also affected due to the power projects which are currently underway.

Commenting on the upper Kotmale project which was turned down by the Central Environmental Authority (CEA), Mr. Deraniyagala said that they would re-submit the project to the CEA as it is deemed vital that this 150 MW plant at upper Kotmale be given the go ahead as natural resources were limited.

CEA Chairman G.K. Amaratunga told The Sunday Times the CEB has agreed to re-submit the proposal after a field study considering the alternative Yoxford option which has been highlighted in the press.

He said the CEA would approve the proposal soon if it conformed to basic requirements.

queries over Forbes public issue

Charges that the public issue of Forbes Ceylon promoted by The Ondaatje Corporation was a rip-off which has cost millions to ordinary shareholders of the company, have been made by a candidate vying for directorship at its forthcoming extraordinary general meeting.

The assets and operating businesses of Forbes & Walker were re-valued sharply upwards after its acquisition by The Ondaatje Corporation (TOC). The bulk of the re-valued assets were then transferred to the newly formed Forbes Ceylon which was in turn sold to the public.

Subsequently, with its balance sheet laden with goodwill, Forbes Ceylon prices plummeted with the company being unable to generate sufficient profits to sustain the offer price. Christopher Ondaatje subsequently later out of TOC.

"Obviously Ondaatje and the proprietors of Forbes and Walker have been the beneficiaries," former President of the Institute of Chartered Accountants of Sri Lanka Gamini Wickremanayake alleged. He is one of the three independent directors put forward by Asia Capital.

"It is the uneducated public that has lost," he added.

At the time FCL shares were also bought by foreign investment funds and even the underwriters were reputed to have bought shares to make the offer fully subscribed. Forbes Ceylon however was not the only company which made public offers with balance sheets padded with operating businesses re-valued on projected earnings.

"I feel this is all a rip-off a type of rip-off we cannot entertain," Mr. Wickremanayake charged. He alleged there were book entry transactions within the Forbes group where goods and services appeared to be exchanged among connected companies, with only a few market transactions.

Asia Chief Ian Hardy said they were concerned about the proposed take-over of Forbes by Vanik as it may be in the best interests of the shareholders.

If Forbes Ceylon found that it could not use the funds raised according to the objectives set out in the prospectus, excess cash should be returned to the shareholders, Mr. Hardy said.

In another development Asia Capital Ltd. forwarded its offer document to shareholders of Vanik.

Mr. Hardy said he believed that his company had complied with the legal requirements of delivering the letter within the stipulated four week period.

Vanik has to respond to this move by circularising shareholders with independent financial advice within 14 days. The letter had been hand delivered to Vanik on February 24 but shareholders receive it later via the postal system. Last a postal workers were working to rule.

This week on March 5, Vanik is to hold a general meeting to gain shareholder approval for its proposed purchase of Forbes Ceylon.

Asia Capital has requisitioned an EGM of Forbes Ceylon on March 10 to get three independent directors to the Board of the company, including Mr. Wickremanayake.

Kerala prefers Colombo to New Delhi

Top businessmen in Kerala are seeking direct trade ties with Sri Lanka, saying it is faster and cheaper to come to Colombo for business than to go to the Indian capital of New Delhi.

An initial investment of about Indian Rs. 10 million is on the cards, following a visit recently by Kerala businessmen.

Shivadas Menon who heads the Kerala branch of the Confederation of Indian Industry (CII) told 'The Sunday Times Business' that two members of the Kerala delegation had signed deals with a solar energy company here. Deals were also signed for coconut processing machinery and agri-implements with local businessmen.

Mr. Menon said the possibility of a local company opening up two tourist resorts in Kerala was being considered.

CII is the largest apex industrial body in India with 3,200 members. This is the first time a 16-member delegation from Kerala had come to Colombo and also visited Kandy, he said.

Speaking very positively about doing joint business with the private sector here and gaining state cooperation for their ventures, Mr. Menon said, "We must break down political barriers and promote business between our countries. It takes me less time to come to Colombo than to go to Delhi. Doing business in Colombo is cheaper".

Mr. Menon giving an example said a member of our delegation may be explaining the possibility of importing animal bones for gelatine production. A ton of bones from Colombo costs between Indian Rs. 400/- and 500/- but the same commodity from Delhi costs up to Rs. 1,500/-. To overcome political barriers in exporting to Pakistan, the Kerala delegation is also assessing the possibilities of manufacturing in Sri Lanka, purely for the purpose of re-export to Pakistan, he said.

Market focus

Foreign activity sustains CSM

By Analyst

The 'csm' ASPI remained stagnant throughout the review period at 617 levels. Average daily turnover showed some improvement to Rs. 26 million from the previous review-period of Rs. 20 million. Foreign activity was evident with nearly 50% of the business generated by overseas investors.

Vanik vs. Asia Capital 'bidding war' hotting-up with the prize catch being Forbes Ceylon, an extraordinary meeting had been called by Vanik relevant to this matter. Most analysts believe the main hindrance to a takeover of a quoted company is the Take-Over and Mergers Act which interpreted to the letter does not reflect the actual scenario prevalent in the market, which would be detrimental to the growth of the Market in the longrun.

Companies to watch:

CTC Eagle: Release of the full year's results of CTC Eagle indicates a profit after tax of Rs. 88.2 million an increase of 16.6% from 1995. The price is in the region of Rs. 40, and the counter is trading at P/E 6.1.

For 1997 an income growth of 8% and a life-fund surplus increase of 46% is expected. The expected growth in income as expected should most probably be discounted by the high probability for provisions for bad-debts to be incurred for 1997, as it is foreseeable that due to liberal credit policies in general insurance business bad debt risk is high due to the prevalent economic scenario.


Long-term (6 months) buy at Rs. 30.00

In the coming weeks due to the election campaign, it is expected that violence could occur more frequently during the election period, therefore it is recommended to invest only in fundamentally attractive counters.



CTC Eagle/CTC Tobacco/Ceylon Cold Stores/UML/MBSL/Dipped Products/Forbes

New Treasury bonds to finance budget

The new two-year Treasury Bonds will be launched in the first week of March 1997, a Central Bank release said. These bonds will be issued by the Central Bank on behalf of the government in terms of the recent amendment to the Registered Stock and Securities Ordinance.

This instrument will be used to finance the Government budgetary expenditure. It is intended to issue Rs. 500 million each fortnight upto the end of 1997.

At present, government borrowings are essentially done through Treasury Bills and Rupee Loans. Rupee Loans are issued with interest rates fixed administratively and are transferable by registration. Therefore, these instruments are not readily marketable in the debt market.

Treasury Bonds, unlike Rupee Loans, are intended to be truely marketable debt instruments. Treasury Bonds will be issued by way of auctions with a coupon rate. Investors are free to bid at a discount or at a premium or at par indicating their perception of the yield required. These bonds can be transferred by endorsement and delivery and this would result in the development of an active secondary market.

Launching of the instrument is a significant step in the development of the debt and capital markets in this country as this will be the first time that a marketable debt instrument having a medium and long term maturitty will be issued by the Government. It is the intention of the Central Bank to issue these instruments for longer periods in the future. Therefore, a yield curve will develop for the government debt securities based on market perceptions. This would help in the future to create a bench mark for the issue of private debt instruments.

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