28th September 1997


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NDB works out landmark deal

By Asantha Sirimanne

The National Development Bank which raised US $ 50 mn directly from international markets to finance small and medium industries (SMIs) is to operate the country's biggest ever sinking fund to help pay back the amount in a single tranche after ten years.

Earlier foreign credit lines used by NDB had been channelled via the government. Previous SMI schemes had used concessionary funds from World Bank and Asian Development Bank, re - lent to NDB at the Average Weighted Deposit Rate (AWDR) by the government.

But with concessionary funding drying up, the NDB had decided to go it alone and borrow at market rates.

The dollar and yen denominated syndicated loan was lead managed by the Industrial Development Bank and Nippon Life Insurance Company. Dresdner (South East Asia) Ltd., Bank of Nova Scotia Asia Ltd., Dai - Ichi Kangyo Bank and Berlin Bank were also involved in the deal.

The yen component valued at around US $ 20 mn (Japanese ¥ 2.3 bn) carries an interest rate based on the ten year Japanese government bond rate, and the US dollar denominated balance $ 30 mn carries a rate based on the ten year US treasuries yield.

Before the NDB, no Sri Lankan corporate had raised international funds for more than 3 years.

NDB has so far not released the amount of premium it is paying above the bond rates.

"I think we got a very good rate," NDB Assistant General Manager Treasury, Nilan Jayasinghe said.

The principle of the loan is guaranteed by the ADB and interest payments by the government of Sri Lanka.

He said there had been a lot of interest from the international finance houses to structure the deal and the bank had chosen the best proposal from half dozen responses received.

Despite the AAA rated ADB guaranteeing the principal, and the debt therefore effectively carrying ADB's risk, Mr. Jayasinghe says the price was indicative of the rate that a high quality Sri Lankan corporate could get.

"Financial institutions are not going to lend simply because ADB guaranteed the principal. These funds are ultimately used inside Sri Lanka. They examined NDB and its track record," Mr. Jayasinghe said.

To reassure lenders the NDB had decided to set up a sinking fund, a strategy to help make the bullet repayment at maturity, with the involvement of the government.

The foreign exchange risk of the loan is assumed by the government, and any shortfall on account of devaluation will be met by the government. In return the NDB is paying a fee to the government on a formula based on, among other things, the average weighted deposit rate (AWDR).

The NDB will start channeling small amounts of cash in to the sinking fund from the end of the first year itself.

With each passing year the sinking fund in turn will buy into mostly Sri Lankan government debt with the cash flowing into the fund, The fund will be liquidated in ten year's time to repay the principal.

The US $ 50 mn syndicated loan together with a further US $ 5 mn received from the ADB will be used for the NDB's new credit scheme called Small and Medium Industry Assistance Project (SMAP).

The SMAP loans are expected to carry an interest rate between 16 and 18 per cent per annum, depending on the risk profile of the project. But some loans would be also available at a floating rate based on the AWDR, for investors who are capable of coping with variable interest rates.

The loans are the fourth in a series of schemes previously known as Small and Medium Industry (SMI) loans.

"In 1979 we identified the SMI's as a core sector of the economy needing credit," NDB General Manger, Ranjith Fernando said.

Since then 15,700 enterprises have obtained loans. A World Bank survey of 35 countries that had SMI projects found Sri Lanka and Ecuador to have the best repayment record, Mr. Fernando said.

The SMI loans are disbursed by the five major commercial banks, the DFCC and regional rural development banks in Kurunegala, Kegalle and Kandy.

This time the NDB itself and the NGOs Sarvodaya and Sanasa will also disburse loans. NDB now has three branches and a further three are expected to be opened next year. Within the next few years the bank will have a network of 30 branches, NDB's SMI Manager, R. D. Gunapala said.

The NDB expects up to 10,000 SMAP loans to be granted within the next two years with the funds given to the credit institutions participating the scheme. The credit institutions would get 70 per cent of the loan amount. The balance 30 per cent would be from the institutions own funds.

Enterprises with fixed assets of less than Rs 10 mn are eligible for SMAP loans. Repayment could be stretched up to 10 years with a grace period of 2 years, Assistant General Manager A. L. Somaratne said.

Broken toymaker in a spin

Amidst market speculation about foreign buyers showing keen interest in the collapsed toy maker Magpeck Exports Ltd., its cheif exective says the company could make a come back as a furniture producer.

Magpek's Chief Executive Officer A. T. Mylvaganam says he would advice prospective buyers not to move into the production of children's toys, as it is a very intricate, highly safety concious market.

"Instead the company could use the machinery to manufacture other forms of wooden furniture. There is nothing wrong with the machinery, it is not only geared to make children toys," he said.

The machinery owned by Magpek is beleived to be amongst the best in Asia.

The Ministry of Labour is said to have made a request through the Board of Investment (BOI) to government delegations who are visiting East Asian countries to look for a prospective investors for Magpek.

But Mr. Mylvaganam said that he is unable to confirm this.

Meanwhile shares of Magpeck continue to trade more vigorously Observors say that shares are more active after the closure of the company.

Mr. Mylvaganam said speculation of a foreign buyer has triggered a rush to buy and sell shares.

Insiders say that since the company ceased operations, certain shareholders began selling off large parcel of shares over the past few months which have also triggered speculative buying.

Shares are going in the market for around Rs. 1.50. Investigations have revealed that certain buyers purchase large parcels of shares for Rs. 1.50 and then sell them off in the next few days for Rs. 1.75 per share.

The Surveillance and Enforcement Division of the Colombo Stock Exchange (CSE) has sought clarification from the company.

"I have repeatadly told the CSE that I have no knowledge as to why there is a sudden interest in our shares, because the company has ceased operations," Mr. Mylvaganam said.

Magpek made children's wooden toys for overseas markets. The company ran into financial difficulties when three of its major buyers who accounted for nearly 80 per cent of its revenue, decided to change their product line.

Meanwhile, countries like Poland and China were competing for the same line of products made by Magpek but at a lower price. The buyers introduced new intricate designs, which Magpek's workforce was unable to execute nor maintain the required quality standards demanded.

Orders were returned, and the firm received claims amounting to US$ 450,000 over the last two years.

The workforce too began to play up, and the unions continued to make demands for higher wages, despite Magpek to suffering losses, the company said.

Instead of developing new product lines the company had invested too much money in plant and buildings, Mr. Mylvaganam said.

Mr. Mylvaganam claimed that "the company grew into a big monster that was controlled by labour forces", since nearly 80 per cent of the company's operations were labour intensive.

Continue to Business page 2 *4 million Watawala shares on offer *South Asian tourism need binding action *Sitha Eliya to draw Indians

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