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
“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
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
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
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
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.
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
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
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
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
“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
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
JKH, Spence hotels not among Travellers’
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)