Portfolio Selection Short Term Corporate Debt

When we analyze the current economic factors, the interest rates are expected to be further increased within the next year. Therefore it is preferred to invest in short term corporate debts and short term fixed deposits rather than going for long term corporate debt and long term fixed deposits. Thats why we invested heavily under those categories in our portfolio. The main reason for investing in the Fixed Deposit is to get the high interested rates. While someone is keeping his money with Savings Account, he will get 4.5% p.a. as the interest rate for his money. It is very low compare to the Fixed Deposit. Keeping money in the Savings Bank account is good when someone has urgent needs, but if it is known that there is no spending for the money, moving it to FD is the best option to get the highest rates. People tend to invest their money in property, share market and on purchasing vehicles in the previous year as the interest rates offered by the commercial banks were relatively low. Rupee liquidity in the financial market begun to tight from the beginning of the year 2012 and the financial institutions compelled to offer higher interest rates to attract customer deposits to bridge this liquidity gap. So its high time that someone should consider investing his money on Fixed Deposits to get maximum benefits. Now most of the banks offer decent interest rates on Fixed Deposit.

The corporate debt market is the widely-used term in Sri Lanka, for the private sector debt securities market. The corporate debt securities generally include short term debt instruments, such as commercial paper and long-term debt securities such as private sector securities (corporate bonds) with maturity of one year or more. The corporate debt securities can be classified into floating rate and fixed rate instruments, secured or unsecured and public offered or privately placed. A developed private sector debt securities market could provide a stable source of finance when the equity market is volatile and resource requirements of the corporate entities are large. The issuance of debt securities by the private sector entities results public benefit both at the macro-economic level and at the micro-economic corporate level. Because of widespread government budget deficit situation globally, it is possible to generalise that governments are unable to finance the massive investment required for national infrastructure projects. At the corporate level a proper mix of equity and debt is vital for efficient corporate growth under normal business circumstances. Without debt financing, the growth of the corporate sector would tend to be constrained. The private sector enterprises have two basic means of financing; from securing loans from

banks and by issuing bonds in the capital market. Corporate debt securities, especially bonds with maturities of more than one year, are generally cost effective for long-term, large-scale and opportunistic financing by issuers with a high credit rating. Meanwhile, bank loans are cost effective for short-term, small-scale and recurring finances by borrowers with a lower credit rating or without a credit rating.

Sri Lanka-Present Scenario

In Sri Lanka the corporate bond market was inactive in 2011 according to the Central Banks Annual Report. There was one solitary issue of debentures amounting to Rs. 1 billion listed on the Colombo Stock Exchange in 2011. The issue was offered both at fixed and floating interest rates. In addition four debentures were issued in the market by way of an introduction. The trading turnover of debentures on the Debt Securities Trading System of the Colombo Stock Exchange (DEX) was Rs. 2.7 billion in 2011. Listed bonds are not actively traded in the DEX system.

Our Selections:
Commercial Paper: 3 month BBB Yield 16.90%

Deposits: BB Bank Deposit - Yield 13.00% BBB Finance Company - Yield 16.00% BB Finance Company Yield 16.50%

Long Term Corporate Debt Securities

Though it is expected that the interest rates would go up in the next year based on the current economic analysis, one cant be certain on such outcomes. Due to sudden policy changes, interest rates might go down as well. To facilitate such scenarios and to make our portfolio more diversified, we invested certain amount of funds in long term corporate debts as well. According to the economic analysts, Sri Lanka needs to develop its corporate debt securities market in order to attract investments as the banking sector is not in a position to finance long term projects that are

required for the post-conflict economy to realise its growth potential. John Keells Holdings President, Head of Corporate Finance and Strategy, Krishan Balendra said foreign investor appetite for rupee denominated bonds was healthy with the conglomerate receiving many inquiries.

Our Selections: BBB 20% 5year Bond Coupon Rate 20%

Accrued interest:

Fixed Income Unit Trust(s)

Our Selections: Eagle Income Fund Ceybank Savings Plus Money Market

Reference: http://www.ft.lk/2012/10/17/towards-development-of-sri-lankas-corporate-debt-market/