Sri Lanka’s over US$ ($) 500 million leasing industry plans to raise between $ 150-250 million from international capital markets to circumvent high borrowing costs locally, an official told this newspaper.
Kamal Yatawara, Chairman Finance Houses Association of Sri Lanka (FHA) and director/CEO The Finance Company plc said that an international donor agency whose name he didn’t want to be quoted is facilitating this effort.
FHA members which are regulated by the Central Bank of Sri Lanka (CBSL) comprise some 44 registered finance companies (RFCs). Additionally there are 17 specialised leasing companies (SLCs) also regulated by CBSL. RFCs’ annual leasing portfolio alone is valued at Rs. 600 billion ($ 455 million*).
Yatawara said that he expects the interest charged by international creditors in this endeavour be in the single digit range. The tenure of the loan would be five years, he added.
Yatwara said that due to the tight liquidity situation, local deposit costs were as high as 16%, a carrot as an inducement to the consumer to place their deposits with the industry, but at the cost of having industry margins squeezed because in an economic downturn such as what the country is currently facing due to various reasons, RFCs therefore cannot afford the risk of charging inordinate interest rates on borrowers as they would then run the risk of their loans going into default due to the borrowers’ inability to repay in such an environment.
“There is however a lot of cheap money available in international markets,” he said.
An FHA sub committee headed by Managing Director Alliance Finance Company plc Romani de Silva is examining the feasibility of this project. It’s learnt that the FHA has written to its members, seeking letters of intent, including details pertaining to their lease receivables portfolio, to pursue further on this matter.
Recently Government of Sri Lanka (GoSL) raised $ 1,000 million from international markets of a 10 year tenure at an interest rate of 5.88%, whilst a few weeks earlier Bank of Ceylon raised a $ 500 million bond issue of a five year tenure at an interest rate of 6.875%.
A source said that the reason why they are pitching to raise from international markets a “low” figure of between $150-250 million compared to the size of the local leasing market was because this was an industry first.
Meanwhile Yatawara said that People’s Leasing Company plc, arguably the industry’s biggest lessor with a monthly leasing receivables portfolio of Rs. five billion ($37.9 million*) had however decided to go it alone to seek $ 150 million from international capital markets, without being dependent on this project.
He further said that the industry plans to float a special purpose vehicle (SPV) to act as a conduit to collect lease receivables in this scheme for which a custodial bank will be nominated. Both local and foreign banks (with branches here) have been approached for this purpose, said Yatawara.
They are expected to structure this SPV in the event this project is found to be feasible. The SPV will also have to obtain a rating, going forward. That is much more feasible than each company obtaining a separate rating, he said. Additionally the services of lawyers will have to be got to look at the legal aspects of this issue, said Yatawara. All this is costs.
He further said that the donor agency would facilitate in the marketing of this issue. Yatawara however didn’t envisage that there would be a necessity to market it in the West. “The issue that we are planning is small by international standards,” he said.
Another source said that as per this donor agency’s requirement, the facility will have to be considered as an off balance sheet item. But the problem in this regard, especially after the financial crisis in the West is that CBSL doesn’t want such liabilities to be considered as an off balance item, he said.
In a project such as this, a balance sheet item is identified as a loan, while in the case of an off balance sheet item, in an eventuality, the creditors will have recourse to seizing the assets lying to the credit of the SPV with minimal bureaucracy.
Another is that this type of collective securitization is also an industry first, bringing with it its own problems in such a scenario.
So these are some of the hurdles that the industry will have to overcome before seeing to it that this project becomes a reality.
However the source also said that it was because of CBSL Governor Ajith Nivard Cabraal’s request that the industry should seek funding overseas that such a plan received a thrust, in addition to it being also taken up by the industry. By law all RFCs also have to be listed, though this rule does not apply to SLCs. Except for a handful, most RFCs are currently listed, said Yatawara. On a rule of thumb, RFCs biggest asset base is its lease receivables portfolio, he said.