PT capital soars 400% in 1H of operations to Rs. 1.1 billion in 2014
Makes profits of Rs. 816 million from 1 April-31 September 2014
Says intention to focus on long-term bonds and secondary market trading from inception
Insists interest rates were kept artificially low ahead of February bond
Accurate bond sale predictions possible up to 2045 on CB data
Perpetual Treasuries yesterday told the Bond Commission interest rates of Government Securities had been artificially low in the run-up to the controversial bond sale on 27 February 2015 and it had consistently dealt with long-term bonds on the secondary market.
Perpetual Treasuries CEO Kasun Palisena, testifying before the Presidential Commission appointed to inquire into the controversial bond transactions, insisted the primary dealer had consistently focused on long-term bonds with the company’s intentions even being spelled out in its business plan when the primary dealer applied for a licence from the Central Bank in 2012.
Perpetual Treasuries had also requested the Central Bank to issue more long-term bonds to avoid bunching of debt as seen in 2012 and 2013 and also improve liquidity in the secondary market, which Palisena claimed at that point had few transactions as it had limited liquidity.
The trading license was subsequently granted in October 2013 and Palisena joined Perpetual Treasuries a month later. However, other delays beset the company and it began trading only in February 2014, Palisena said during extensive questioning by his lawyer Nihal Fernando PC. According to Palisena, Perpetual Asset Management had transferred the necessary capital of Rs. 310 million for Perpetual Treasuries to begin operations as Central Bank regulations mandated that primary dealers required Rs. 300 million or more in capital to trade.
From 1 April 2014 to September 2014 Perpetual Treasuries amassed Rs. 816 million in profits and increased their capital to Rs. 1.1 billion by trading aggressively and concentrating on long-term bond trades in the secondary markets, which had about three times the capital gains returns as short-term bonds.
The commission also heard that during this time Perpetual Treasuries gained a reputation in the industry as a “price-maker” for its assertive trading. Former Central Bank Governor Ajith Nivard Cabraal’s sister Shiromi Wickremasinghe was also a director of the company in 2014.
However, once the US Federal Reserve announced it would roll back its quantitative easing in 2014 capital began to flow out of emerging markets as interest rates began to rise. Palisena recalled that as much as $ 700 million flowed out of Sri Lanka’s Government Securities market and foreign reserves reduced by about $ 2 billion as the Government continued to shore up interest rates and spend reserves to keep the rupee from depreciating. The upshot of all this was Sri Lanka heading to a Balance of Payments crisis at the start of 2015, which prompted the new Government of President Sirisena to negotiate a $ 1.5 billion three-year Extended Fund Facility (EFF) with the International Monetary Fund (IMF).
The unusual situation was worsened by the announcement of presidential elections in November resulting in market appetite declining significantly. Perpetual Treasuries responded by selling most of its bonds by October and slashing its portfolio to about Rs. 3-5 billion by December as the market waited for the political uncertainty to end with presidential elections in January 2015. As a result the primary dealer’s capital also declined marginally to Rs. 1.04 billion after a market re-evaluation.
Palisena’s counsel also presented extensive documents to the commission outlining how Perpetual Treasuries could have predicted the funding requirements of the Government each month. They pointed out that since the Central Bank tracks debt, funding needs of the government were public knowledge till 2045, and therefore inside information would not be required by a primary dealer when placing bids.
Perpetual Treasuries also stressed that they were one of the primary dealers to use the Bloomberg platform in 2014 and 2015, before it was made mandatory by Central Bank Governor Dr. Indrajit Coomaraswamy in 2016.