Re-negotiations the only way to come out of hedging pit

By Indika Sakalasooriya
The Ceylon Petroleum Corporation (CPC) and the banks involved in the controversial hedging deal, should resort to a negotiated solution as the country’s Supreme Court last week terminated the interim order that ruled the hedging transactions null and void, analysts say.

CPC will have three options to choose from, they point out. “CPC can either honour the hedging deal that it entered with five banks and which is due to expire in May 2009, or it can just walk away from it, though the implications would be appalling. These are both extreme choices that would harm either party negatively”

“The third solution, which can more or less be called a win-win situation, is for both parties to go for a negotiated solution, by re-structuring the original hedging deal.” an analyst who preferred to be unnamed, told The Bottom Line.

As he further explained, given the current situation of the country’s external reserve position, the Treasury is unlikely to opt for the first choice by paying the hedging contracts as agreed, which is of course, estimated to be a whopping USD 300 to 500 million.
The stance of the Monetary Board of the country, which was expressed in a press release issued by Central Bank last week, said the transactions CPC has entered with a number of banks were “materially affected and substantially tainted”.

“This directly tells the banks not to proceed with hedging transactions until further notice. But it would be interesting to see whether these banks can go by this directive as when they entered into to these hedging transactions, they had transferred the risk associated with the deal with one or several counter-party financiers. So the interesting question is can they not honour these inter-bank relationships?” he remarked.

According to a Fitch Rating report a couple weeks back, the banks involved in the hedging deal were acting as intermediaries, as the banks structured the deals with corresponding positions, with offshore counterparties, earning a fee or commission and carrying only counterparty default risk.

As the above analyst further pointed out, Standard Chartered Bank and Citi Bank and Deutsch Bank branches in Colombo can hold on to the Monetary Board decision as they’ll be able to settle the transactions with their mother banks relatively easily.

“But we are yet to know the complexities the two Sri Lankan banks, Commercial Bank and People’s Bank are exposed to when entering the hedging transactions with CPC. We don’t know how these banks have dealt with the risk element involved with the transaction. They might have transferred the risk element partially to several other local and international banks and institutions. In other words, both the banks are exposed to counter party risks” said.

Another analyst who too wanted to be unnamed, brought out the point that a possible non-payment as proposed by the Monetary Board can even trigger a systemic effect given the nature of inter-bank dealings the two Lankan banks had with other banks related to the hedging deal. For example the People’s Bank entered the CPC hedging transactions through ComBank” he said.
However so far there have been no claims either by the ComBank or the people’s Bank over an inter-bank transaction with any other local bank pertaining to the hedging deal.

Dr. Harsha De Silva, one of country’s most vociferous economists told The Nation Economist that he believes it is unlikely that international counter-party financial transactions will be reneged as the country is seeking to raise increased funds from foreign markets in order to tackle its impending Balance of Payment crisis.
“Therefore whether we like or not, the hedging transactions have to be re-negotiated with the participation and corporation of both parties involved in it,” De Silva said.

He also pointed out that if the CPC resorts to not paying the banks, the three international banks, Standard Chartered, Deutsch Bank and Citi Bank can even seek the assistance of an international arbitration court, like Prima Ceylon Limited did recently.

Impact on ComBank

According to a research report issued by CT Smith Stock Brokers last week the total counter-party exposure of the ComBank would amount to approximately USD 25.53 million (including the November and December dues based on a WTI crude oil price of USD 35 per barrel) if People’s Bank continue to dishonour its payments in the counter-party hedge agreement.
Though earlier it was understood ComBank had a relatively low exposure to the CPC hedge, the Bank disclosed on December 2, that it was liable to pay its international counter-party to the hedge a sum of USD 8.93 million in order to honour its position.
In addition ComBank subsequently disclosed that People’s Bank which entered hedging deals through ComBank also failed to honour its November and December 2008 payments, to Combank in respect of this counter-party hedge agreement amounting to USD 3.93 million.


 You see the inflation is going down...                    

CBSL Deputy Governor W.A Wijewardena along with CBSL Governor Ajith Nivard Cabraal last week announced that the country’s inflation in the 12 months to January 2009 had dropped to 10.7 percent from 14.4 percent in December 2008
(Pic by Thushara Dasanayake)


Seylan’s islandwide branch network the main attraction

The gradually recovering Seylan Bank PLC’s islandwide branch network has begun stirring the interest of several parties who are looking to acquiring the controlling stake of the Bank in order to expand their own banking network, market sources say.

Seylan Bank PLC has a branch network of more than 100 branches covering almost all districts in the country.
As market sources point out, Seylan is a good choice for the banks and financial institutions who are looking to expand or venture into banking, as Seylan already has the infrastructure for this throughout the country.

As they point out, the possible interested parties would be Sampath Bank, LOLC and John Keells Holdings.
According to a stock market analyst, this could be an opportunity for ICICI Bank which runs a very limited operation in the country and has only a single branch in Colombo.

“It has the financial capacity to acquire Seylan, if it is ready to take that strategic decision” he said.
The Sampath Bank and LOLC through stock exchange filings last week however, have said that they have not expressed interest in purchasing a controlling stake in the Seylan Bank.


SLT appoints new CEO

Chairperson of Sri Lanka Telecom, Leisha De Silva Chandrasena last Friday announced that Greg Young has been appointed as the new Chief Executive Officer of Sri Lanka Telecom. Greg Young is an Australian citizen who was in employment in USA with a background in telecommunications. He will assume his duties as CEO of SLT from February 2, 2009.


Analysts advise stock market investment despite global crunch

By Aisha Edris
Despite the global economic crisis, analysts in the Colombo bourse emphasised stock market investors should continue with their investments in selected sectors.
According to analysts due to the global economic crisis, many stock market investors and to-be investors are running away from the markets, mainly due to the fear of losing their investments while few others prefer to wait and watch.

Lanka Securities Pvt Ltd, head of research, Srimal Liyanage advices an investor or even prospective investors should look at a complete financial analysis of a company or a sector before he/she invests in shares.

Meanwhile, JB Securities, Managing Director, Murtaza Jafferjee pointed out that since Sri Lanka is facing a decrease in inflation, it is advisable for investors to start investing both in the stock market and also in government bonds.

“Investors have two options during this period, either to invest in the stock market or to purchase government bonds,” he said.
Jafferjee explained that if an investor hopes to purchase government bonds, they should go for longer term bonds. “Before interests fall they should purchase longer terms bonds since the yield will be high.”

He added that since inflation is continuously falling, it is advisable for a person to purchase four year government bonds. Meanwhile, Srimal Liyanage also added if people are not interested in investing in the stock market, they could deposit in Treasury bills and fixed deposits.

Invest in shares

Liyanage suggested that if an investor is hoping to purchase shares, they should not focus on one sector alone since most of the sectors are affected due to the economic crisis.
Both Jefferjee and Liyanage recommended that looking at long term gains, the hospitality sector will be one of the leading sectors to invest shares.

According to Jefferjee, since the government is wining the war, there will be post conflict development in North and the East and many tourists will want to see the once war zones.
“We are also anticipating the security situation in the country to improve. The countries imposing travel advisories might remove them, which will be a huge advantage for the country.”

He added Sri Lankan hospitality industry is one of the cheapest destinations in the South Asian region. At presently, many tourists are looking at low cost destinations, experts predicted that if the ongoing war ends, there will be huge prospects for the local hospitality industry.

Meanwhile, Srimal Liyanage added that the hotel industry is trading at net book value and if an investor is looking at long term prospects in the hospitality industry, the present situation is the ideal situation to purchase shares.
“Looking at the present situation, it is better for an investor to acquire a hotel since hotels shares are trading low. They will have long term prospects if the war is sorted by the Government,” he explained.

However, he added that prior to purchasing shares investors should also look at Government policies relating to the industries.
Experts further suggested, investors could invest in the banking sector of the country. But they warned that the interest on deposits might come down if the inflation rate continues fall, and the loan growth of banks might reduce.

“Liquidity level of non-performing loans might come down due to the fall in interest rates,” Jafferjee added.
According to Srimal Liyanage, during a crisis situation, companies will be facing difficulties due to the fall in demand. “If an investor is interested in purchasing shares during the current economic crisis, he/she should look at the financial aspect of the company.”
Liyanage added if a company pays its shareholders a good dividend, and if it is a low geared company, it will be feasible for an investor to invest in such company.

Analysts also pointed out that the construction industry might face a positive growth if the war ends. According to Liyanage, there will be major development projects in North and the East which will benefit the construction industry.

Precautions to be taken

At present, stock market has reached a bedrock level, and as a result the share prices might not fall further. Experts believed that investors should purchase shares during the current period. However they warned that they should be careful in purchasing shares.
They also warned that the investors should not purchase bulk shares from one certain company: rather they should purchase shares in small quantities and divest the shares when the share prices rises.

According to Srimal, a retailer should not go according to a technical analysis of a company but they should analyse the cash flow and the financial status of a company.
“In the short term, they should look at how the market behaves prior to investing and they should invest in small quantities,” he suggested.

He also warned that if a retailer is looking at short term gains, he should not purchase shares.
A study of the history of stock markets shows that despite the enormous social, political and economic upheavals over the past two centuries, stock markets have always return back on track in the long run. Even after the two world wars and numerous other conflicts, even after the great depression, terrorist attacks, the long term payback provided by owning stock has been successful.


Will our Suzlon blades crack too?

Suzlon Energy Ltd., India’s biggest maker of wind-turbine generators, reported a loss in the third- quarter after making payments to replace faulty equipment and the value of its orders declined. The loss, including that of units, was 589.7 million rupees ($12 million) in the three months ended Dec. 31 compared with a profit of 1.52 billion rupees a year earlier, according to Bloomberg.

The company’s shares fell 84 percent last year on concern that its equipment was faulty and some U.S. customers cancelled orders after Suzlon’s blades cracked. The company spent 2.33 billion rupees in the quarter on replacing and fixing faulty blades compared with 187.4 million rupees a year earlier. The mark-to-market loss on foreign exchange contracts was 1.24 billion rupees for the group.

Last week, in our Business Snippets we reported that Suzlon has entered the Lankan wind market with an order to supply 10 MW of Wind Turbine capacity to project developed by Senok wind Power Ltd.
It has already supplied Senok with eight units of Suzlon’s S64 1.25 MW wind turbines for the project located in Kalpitiya.

Mushin quits JKH board

M. V. Muhsin, who has served the Board of John Keells Holdings PLC from 2005, has informed the Board that due to personal commitments he would not be available for re-election this year and that he desires to step down effective March 1, 2009, the company said in statement.
The Board has accepted his resignation with effect from March 1, 2009 in deference to his request. The Board thanks Muhsin for his valuable contribution during his tenure on the Board.
Mushin was under heavy fire of the world media over an alleged practice of conflict of interest in his tenure in the World Bank as the Chief Information Officer.

JKH, Spence hotels not among Travellers’ Choice

Two Sri Lankan Hotels, Ceylon Tea Trails and Kahands Kanda were able to gain mentions in the 2009 Travellers’ Choice Awards organized and conducted by the tripadvisor.com. However though several Maldivian resorts gain honours, properties managed by John Keells Holdings or Aitken Spence in Maldives were not able to feature among them.

Lanka Cement hopeful

Lanka Cement Ltd. last week attributed the recent bull run of its shares to the possibility of the reconstruction of the A9, Colombo-Kandy highway and to the appointment of the new chairman, Sisira J Paranagama
The prospects of opening of the A9 highway in the near future will facilitate the reconstruction of the North as well as the cement factory of Kankasanthurai. This aspect would have had an effect on the trading of LCEM shares.


JKH profits drop 44-pct

Profits at Sri Lanka’s John Keells Holdings group fell 44 percent to 764 million rupees in the December 2008 quarter, with revenues dropping 16 percent to 9.3 billion, its interim accounts said.
In the 9-months to December profits fell 19 percent to 2.6 billion rupees, while revenue grew 7 percent to 29.2 billion rupees.
The group’s transport division saw a steep fall in pre-tax profits to 343 million rupees from 677 million rupees.

The division includes Lanka Marine Services, a bunkering firm, which was hit by a court order that reversed a tax holiday and returned a tank farm to the state.
JKH chairman Susanthe Ratnayake told shareholders that there was a one of charge of 904 million rupees and the business model was changed.

“This format, which combines floating and land based storage operations are still in a nascent stage and is the subject of regular fine tuning as LMS seeks to establish optimum operating efficiencies.”

The company also returned cash to shareholders via a share buy-back losing interest income and its lucrative South Asia Gateway Terminals container terminal at Colombo port was operating at near full capacity.

“The short term outlook for the company remains challenging,” says Channa Amaratunga, chief executive of CT Capital.
“With even South Asia Gateway Terminals, is reaching optimal capacity levels, growth in the trasportation sector may slowdown.”
The leisure sector recovered from a low base to show profits of 109 million rupees against 83 million but property profits feel steeply to 64.2 million rupees from 162.2 million rupees.

The information technology division extended its losses from 8.1 million rupees to 34.8 million rupees, while the remaining businesses also saw profits fall to 148 million rupees from 764 million.
Amaratunga says the group’s gearing is still low and it could chase acquisitions. The firm has raised its stake in SAGT.
Ratnayake said the firm would “cautiously pursue opportunities” to expand its “existing portfolio” while growing internally. (LBO)