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HNB Chief discusses interest rates and corporate debentures

May 20, Colombo (LNW): Under the present conditions, larger banks could secure borrowing rates below 10 per cent over the long term for unsecured or subordinated instruments, such as corporate debentures, said Jonathan Alles, the Chief Executive Officer (CEO) of Hatton National Bank, in an expression of his views on the current borrowing environment for major banks in Sri Lanka.

He added that in the short term, a significant bank could issue an instrument at a rate closer to 11 per cent.

Speaking exclusively in Thimbirigasyaya on May 19, Alles advised patience, predicting that interest rates would eventually decrease.

He anticipated a gradual decline in interest rates in the coming period, although he did not foresee significant cuts by the Monetary Board at their upcoming meeting on May 28.

He also mentioned the possibility of increased rate volatility as elections approach.

Commenting on recent corporate debentures being priced around 13.05 per cent, Alles attributed this to the smaller scale of the issuing institutions.

Despite this, he recognised that such rates were still impressive compared to other market rates, likely due to the strong balance sheets of the issuers’ ultimate owners.

Alles cautioned against locking in rates when they are above long-term averages, a sentiment echoed by other analysts who have criticised the issuance of fixed-rate instruments in such scenarios.

He recalled resisting pressure to issue instruments at rates as high as 26 per cent during last year’s crisis, opting instead to wait for more favourable conditions.

He predicted a slow but steady decline in interest rates moving forward.

Following significant drops in treasury bond rates during the May 13 issuance, the next major bond issuance is scheduled for June 13, after the Monetary Policy decision on May 28.

In the previous issuance, the Weighted Average Yield Rate for bonds maturing in 2028 decreased by 0.71 per cent, for those maturing in 2030 by 0.53 per cent, and for those maturing in 2032 by 0.30 per cent.

Other analysts have noted that an illiquidity premium has been applied to corporate debentures due to the lack of an active market.

The Securities and Exchange Commission of Sri Lanka, along with other entities, has restricted client access to the corporate debenture board on the Atrad system.

Primary dealers and banks have their own proprietary systems for transacting government securities, excluding the Colombo Stock Exchange’s system, which supports repurchase transactions.

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