Research Briefing | Apr 8, 2021

Sri Lanka | Some value remains despite recent bond rally

Ipad Frame (24)-1

Despite the early-2021 rally reducing the previously glaring undervaluation of Sri Lankan bonds, they remain below fair value based on our detailed assessment of default and non-default scenarios. A non-default scenario remains feasible. Procrastination has taken hold, and it may require an intensification of funding pressures to push Sri Lanka away from China and towards the IMF. At that point, a restructuring is possible but not inevitable; clear fiscal measures could limit or avoid bondholder pain.

What you will learn from this report:

  • Maturities from 2024 to 2030 are priced in the 61 to 64 range and all offer good value as they suffer less under a default scenario. Recovery values remain within 15% of current prices; yet NPVs under a non-default offer greater upside.
  • Sri Lanka’s bond of greater than 2-year maturity as being undervalued by an average of 9%, with the 24s offering the best risk-reward.
  • Sri Lanka’s FX reserves are low, but not yet signalling distress.
Back to Resource Hub

Related Services

ECB

Post

Eurozone: ECB minutes indicate that July rate hike is a near-certainty

The minutes from the April ECB meeting confirm the hawkish tilt initiated a few months ago continues to gain momentum. With a majority of the council increasingly concerned about the inflation outlook, this makes an interest rate hike already in July almost certain. This should not come as a surprise, however, as recent developments render hawks' case arguably easier to make.

Find Out More
Japanese yen

Post

For how long will Japan’s households support bonds and the yen?

Households' financial surpluses sharply increased in 2020 and remained high in 2021 due to the Covid pandemic. Most of the surplus continued to go to cash and deposits, but there was a notable increase in funds going to investment trusts (with a large portion invested in foreign equities) in 2021. Amid rising international yield differentials and a weakening yen, there is market chatter about whether this is the beginning of a structural shift from households' risk-averse investment style?

Find Out More