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Sri Lanka: Hope Amidst Turbulence

We initiate our coverage on Sri Lanka’s sovereign bonds (SRILAN complex) with an OVERWEIGHT recommendation. The SRILAN complex comprises SRILAN 19s, 22s, 26s and 27s. We believe Sri Lankan sovereign bonds (Moody’s: B1; S&P: B+) offer attractive yields in the market versus peers such as Vietnam (Moody’s: Ba3; S&P: BB-). Despite the sell-off due to the political chaos, we believe it was overdone.

We price the bonds on top of Vietnam sovereign bonds as the two economies are in a comparable state. It is evident that the yield of the Sri Lanka sovereign bonds (SRILAN 19s) is around 700bps above its Vietnamese sovereign bond peer with a similar maturity. This indicates that existing investors can still reap the rewards. Moody’s rating downgrade last week (20-November) also removed a near-term downgrade risk, in our view.

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