Ceylon dollar fund

The 1st Dollar Fund offer in Sri Lanka

CEY ON BOND FUND INFORMATION MEMORANDUM July 2014

Ceylon Dollar Bond Fund

The Pioneering Dollar Denominated Unit Trust Fund in Sri Lanka Licensed by

Securities and Exchange Commission of Sri Lanka

Trustee and Custodian

Audited by

Fund Manager

281, Union Place, Colombo 02, Sri Lanka.

Tel: +94 11 739 4000 Fax: +94 11 739 4007 E-mail: info@ceylonam.com Web: www.ceylonam.com

Ceylon Asset Management is an Associate Company of

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“Sri Lanka to grow at 7.5% in 2014, the fastest growing economy in South Asia...”

- ADB - www.adb.org

“Sri Lankan economy stable & set to grow over 7%” - IMF - www.imf.org

“Trade deficit narrows by 47.9% in May 2014” - Central Bank of Sri Lanka - www.cbsl.gov.lk

“France’s Coface lists Sri Lanka among 10 emerging countries hot on the heels of BRICS” www.ft.lk - April 29, 2014

“Fitch affirms Sri Lanka at 'BB-'; Outlook Stable” www.reuters.com - April 28, 2014

“Will place Sri Lanka on the global toursim map” Mr. Greg Dogan, President & CEO, Shangri-La Hotels & Resorts 500 room Shangri-La hotel under construction, scheduled to open in 2016 - 17

“Sri Lanka’s time to shine in Asia” James Packer- Opening Crown Casino & Mixed Development in 2016

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The offer at a glance The Ceylon Dollar Bond Fund is an open-ended fund that offers US

risk whilst avoiding exposure to Sri Lankan rupee currency risk.

Dollar returns by investing in Sri Lankan sovereign bonds, bank and corporate dollar bonds, rated by an international rating agency and

The fund is dollar denominated while capital and income can be

listed on a recognised global stock exchange.

repatriated freely in foreign currency to the investors’ bank account via the Trustee and Custodian Bank.

The fund risk is currently limited to sovereign risk and bank guaranteed

Investment Plan

Invests in “rated”, interest bearing, US Dollar denominated Sri Lankan sovereign bonds, bank bonds and bank deposits.

Nature of Fund

Open-ended unit trust offering units on a daily basis.

Issue of Units

The manager shall have the absolute discretion to accept or decline any application for units.

Original Issue Price of a Unit

US$ 1.00

Minimum Investment

US$ 1,000 /-

Front End Fee

0.1%

Management Fee

0.25% per annum (p.a.) of assets under management.

Trustee & Custodian Fee

0.165% p.a. of assets under management.

Exit Fee

Nil

Taxation

All income distributions and capital gains on units are tax-free to investors.

Eligible Investors

– Companies registered outside Sri Lanka – International fund managers – Companies approved by the Board of Investments of Sri Lanka (BOI) – Individuals with foreign passports

Repatriation

All capital and interest earned can be repatriated overseas without restrictions.

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Sovereign Dollar Bonds issued by Sri Lanka

2007 2009

Sri Lanka’s debut international sovereign bond for US $ 500 million with a five year maturity and a coupon rate of 8.25% per annum was oversubscribed by over three (03) times.

The second international sovereign bond for US $ 500 million with a five year maturity and a coupon of 7.40% per annum was oversubscribed by thirteen (13) times. This was the first international offering following the end of the thirty year old internal conflict.

The net proceeds of both bond issues were utilised by the Government of Sri Lanka to supplement available concessional funds to develop infrastructure projects that have been previously approved by the Government and included in the 2007 and 2009 Budgets, including in areas such as electricity generation, water supply, roads, ports, roads and railways development.

2010

Global investors’ demand exceeded over US$ 6 billion for the Sri Lankan sovereign bond issue of US$ 1 billion, being over-subscribed by more than six (06) times.

Sri Lanka finalised a US $ 1 billion 10 year sovereign bond issue with a coupon rate of 6.25% on 27 September 2010. Orders were received from 362 investors globally.

2011 2012

Sri Lanka successfully launched a US$ 1 billion 10-year global bond offering at a fixed-rate yield of 6.25%, representing its fourth US Dollar benchmark offering in the global bond markets since 2007.

Successfully launched and priced a US$ 1 billion 10-year international sovereign bond issue at a yield of 5.875% per annum.

Fitch Ratings, Moody's Investors Service and Standard and Poor’s have rated the issue at 'BB-' with a stable outlook, ‘B1’ with positive outlook and ‘B+' with a stable outlook respectively.

2014

On 06th January 2014, a 5-year US$ 1 billion international sovereign bond was offered at 6% to the international market and was oversubscribed by 3.2 times receiving US$ 3.2 billion from 200 accounts.

On 07th April 2014, Sri Lanka issued another US$ 500 million at the lowest yield of 5.125% per annum among all five-year international sovereign bond issuances to date as a result of the heavy demand worth US$ 4.2 billion.

January 2014 Asia 12%

EU 26%

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USA 62%

April 2014

Source of Global Investor Funds Sovereign Bond Issue

Asia 32% USA 46% EU 22%

Dollar Bonds Issued by Licensed Banks in Sri Lanka The Central Bank of Sri Lanka relaxed guidelines to enable licensed commercial and specialised banks in the country to issue Dollar Bonds to foreign investors. As a result, several commercial banks raised US$ 1.35 billion in international markets during the year 2013.

APRIL 2013

Rated “BB-” by Fitch Ratings Rated “B1” by Moodys

SEPTEMBER 2013 Rated “BB-” by Fitch Ratings State-run National Savings Bank (NSB) issued a dollar bond in September 2013 and successfully raised US$ 750 million at 8.875%.

Sri Lanka's largest lender, sold a US$ 500 million 5-year bond at 5.325% attracting two billion dollars in orders from 140 European and

The issue was oversubscribed by 6.8 times.

Asian based investors.

National Savings Bank is the premier Licensed Specialised Bank in Sri Lead managed by UBS, the bank initially went to the market for US$

Lanka owned by the Government of Sri Lanka (GOSL). It is the only

300 million but sold US$ 500 million, after it was oversubscribed by

bank whose deposits are fully guaranteed by the GOSL as expressed

6.8 times.

explicitly in the statute governing the Bank: 'The repayment of the monies deposited in the bank and of the interest thereon and the

Asian investors had taken 74 percent of the bond with rest being sold

payment due on the surrender of a savings certificate shall be

to investors in Europe. It was not marketed to investors based in the

guaranteed by the GOSL.' (NSB Act No.30 of 1971, Section 18:

US. Bank of America Merrill Lynch, Citi and HSBC were the Joint Lead

Guarantee by the GOSL).

Managers and 'book runners' for the issue.

APRIL 2012

Rated “BB-” by Fitch Ratings Rated “B1” by Moodys Bank of Ceylon raised US$ 500 million through a five-year bond, Sri Lanka's first non-sovereign debt offering since 2004 and the latest illustration of the country's financial progress since the end of a protracted civil war.

The state-owned commercial bank priced the bond at par to yield 6.875%, a much lower yield than expected, after attracting US$ 3.86 billion in orders from 215 accounts. Initial guidance had suggested a yield of around 7.125%.

OCTOBER 2013

Rated “B-” by Fitch Ratings Development Finance Corporation of Ceylon (DFCC Bank) launched a five year dollar denominated bond in international markets, raising US$ 100 million at a rate of 9.625%.

The DFCC Banking Business attempts to create synergies through integrated banking. The bank offers a seamless gamut of financial solutions by integrating the expertise of a pioneer development bank and the energy of a dynamic commercial bank. DFCC Bank, incorporated by an Act of Parliament in 1955 is the country’s first specialised development bank.

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Dollar Bonds Issued by Sri Lankan Airlines

The 5-year government guaranteed international bond by Sri Lankan

SLA is the national airline of Sri Lanka and has a 54% market share of

Airlines (SLA) has been rated ‘B+’, the same as Sri Lanka’s sovereign

travellers to and from the island. Passenger numbers have increased

rating by Standard & Poor’s and ‘BB-(EXP)’ by Fitch Ratings, due to

to 4.3 million in 2013 from 2.6 million in 2010.

the unconditional and irrevocable guarantee provided by the Government. The Sri Lankan Government holds 92% of SLA directly

Rating sensitivities: Negative - Future developments that may lead to

and 7% indirectly through State-owned entities.

negative rating action include a downgrade of Sri Lanka’s sovereign ratings; Positive - Future developments that may lead to positive rating

The bonds constitute direct, unsubordinated, and unsecured

action include an upgrade of Sri Lanka’s sovereign ratings.

obligations of SLA. The proceeds of the issuance are to be used to acquire aircrafts and as working capital. Sri Lankan Airlines has ordered a fleet of new A300 and A350 aircrafts from Airbus.

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Source : www.dailynews.lk/www.ft.lk

The Sri Lanka Economy The Sri Lanka economy grew 7.3% in 2013 due to the high growth rates recorded by the provinces responding to peace. The

Tourist Arrivals ('000)

accelerated infrastructure roll-out in highways, ports, airports, energy and urban development have created the platform for growth. As a result, the Construction, Tourism and Banking sectors have been growing rapidly over the last four years.

The trade deficit has narrowed dramatically by 47.9% in May 2014 as a result of reducing imports and fast growing exports to enable the rupee to stabilise. Containing the budget deficit to 5.9% in 2013 and

1400

1,275

1200

1,006

1000

856

800 600 400

654 448

200 0

reduction of inflation to 4.7% in 2013 has resulted in 1-year treasury

2009

2010

2011

2012

2013

bill rates declining from 10.85% in June 2013 to 6.79% in July 2014.

Analysts expect low interest rates to boost the economy to achieve

Tourism Revenue (US$ Mn.)

the target GDP growth rates of around 7% per annum over the next 5 years.

The opening of Shangri-La and Crown Casino in 2016, together with

2,000

1,800

1,500

Colombo regeneration as a lake and garden city is expected to attract regional tourists. Fuel bunkering at the Hambanthota Port and the

1,000

1,000

830

exploration for off-shore gas and oil are some areas of opportunity currently unaccounted for as Sri Lanka strives to achieve regional hub status for South Asia in ports and tourism.

500 0

576 326

2009

2010

2011

2012

2013

Sri Lanka economic goals for 2016: – US$ 4,000 per capita income (US$ 100 billion GDP by 2016) – GDP Growth above 8% p.a. on average – ICT Literacy rate to increase to 75% from 30% at present – 2.5 Million tourist arrivals & US$ 3 billion revenue

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Economic Overview - Sri Lanka, Asian Development Bank Growth rebounded last year from a slowdown in 2012, and the current account deficit narrowed substantially. As inflation eased, the central bank relaxed its monetary policy. The outlook is for sustained rapid growth leveraging easy private access to credit and the

Food Other Overall

government’s continued drive to expand infrastructure. An improving external environment will lift trade, but the current account deficit will expand on higher imports. Fiscal consolidation will focus on revenue enhancement.

ECONOMIC PERFORMANCE GDP growth by sector GDP growth rebounded to 7.3% in 2013. The recovery reflected

Jan

Jan

Jan

Jan

Jan

Feb

domestic demand strengthening and a pickup in exports and tourism.

Faster growth in the wholesale and retail trade, hotels and restaurants,

Source: Department of Census and Statistics Sri Lanka.

transport, banking, insurance, and real estate lifted performance in the large service sector to 6.4% from 4.6% a year earlier, providing the impetus for the rebound. The industry grew by 9.9%, slightly less than a year earlier, as slower growth in mining and quarrying and in construction offset a pickup in manufacturing and utilities. Favourable weather helped maintain agriculture growth at a relatively favourable 4.7%.

Fiscal indicators The 2013 fiscal deficit is estimated at 5.8% of GDP, in line with the target. The target was hit, despite unexpectedly weak revenues, by compressing current expenditure. Capital expenditure was largely maintained but was again slightly below the target of 6% of GDP.

Agriculture Industry Services Gross domestic product

Revenue including grants is estimated at 13.8% of GDP, lower than both the budget and the 2012 performance. The shortfall in revenue partly reflected measures that curbed certain imports such as automobiles, which suppressed value-added tax (VAT) collections and import-related taxes.

Grants Nontax revenue Tax revenue Investment & net lending Recurrent expenditure Domestic financing Foreign financing

Budget balance

SLRs trillion

Source: Department of Census and Statistics Sri Lanka.

Inflation Inflation trended downwards in 2013, averaging 6.9% for the year.

Food inflation was at about 12% during the first quarter, as drought late

Budget estimate

in 2012 had disrupted domestic food supplies, but then dropped markedly to 0.9% in February 2014. Non-food inflation also moved lower over the year but picked up to 7.1% in January 2014 on with large increases in communications and transport prices that month.

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Source:

Annual Report

Economic Overview – Sri Lanka, Asian Development Bank

Contd.

Government debt

Exchange rates After the sharp depreciation of the Sri Lankan rupee in the early months of 2012, when the exchange rate was allowed to float, the

Foreign Domestic

currency has been broadly stable against the US dollar. Foreign investors’ exit from emerging markets in mid-2013 had only a modest and temporary effect on the exchange rate. The rupee depreciated against the dollar by only 1.9% over 2013. The real effective exchange rate has risen markedly since April 2012, essentially moving back to the rate prevailing prior to the decision to let the currency float.

Sep Monthly average

Source:

The ratio of government debt to GDP fell to 78.4% in September 2013 from 79.1% in 2012. Debt composition is changing with the gradual move towards market and non-concessional instruments, with foreign investment in government securities, and with the rise in income as a middle-income country.

J an

J ul

J an

J ul

J an

J ul

D ec

Credit growth and interest rates To address weak growth, which was evident in 2012, the Central

Source: Central Bank of Sri Lanka. http://www.cbsl.lk

Bank of Sri Lanka relaxed its monetary stance for 2013, which was facilitated by a declining trend in inflation during the year. The bank began its relaxation in mid-December 2012 by cutting policy rates by 25 basis points and continued in May and October 2013 with rate

Current account components

reductions of 50 points in each adjustment. Commercial bank lending

Exports and imports both posted positive growth only in the second

interest rates declined markedly during the year from 14.3% in January

half of 2013, following weakness a year earlier. Export earnings

2013 to 9.9% in December. However, credit to the private sector

increased by 6.3% for the year to US$ 10.4 billion, reflecting the

continued to decelerate, with year-on-year growth slowing to 7.5% in

gradual recovery of demand in partner countries, with garment exports

December 2013 from 17.6% at the end of 2012.

increasing by 13.0% and agricultural exports, mostly tea, advancing by 10.7%. Imports, on the other hand, declined by 6.2% during 2013 to US$ 18 billion as a result of the less demand for oil, the policy

Reverse-repurchase rate Repurchase rate Weighted average prime lending rate

Private sector credit growth Government sector credit growth

measures adopted in 2012 to rationalise imports, and the subdued commodity prices in international markets. Most of the fall was due to reduced imports of transport equipment by 32.7% and fuel by 14.7%.

The trade deficit fell to 11.4% of GDP, a marked decline of 4.4 percentage points from 2012.

The tourism boom continued in 2013 with the number of visitors growing by 27% to reach 1.2 million and earnings expanding by 35% to US$ 1.4 billion. Tourist arrivals from the People’s Republic of China and the Russian Federation increased significantly, but Western Europe continued to be a large source of visitors. Workers’

Jan

Jul

Jan

Jul

Jan

remittances expanded by 13% to $6.8 billion in 2013. The main factors boosting

Source: Central Bank of Sri Lanka. Weekly Economic

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Economic Overview – Sri Lanka, Asian Development Bank

Contd.

ECONOMIC PROSPECTS

Current transfers Services balance Exports Imports Income balance Current account balance

An improving external environment, higher investments, and a recovery in domestic consumption will sustain a rapid pace of GDP growth in

during the next 2 years. The recent relaxation in the

monetary policy will allow more lending to the private sector and provide an impetus for expansion. Sri Lanka’s post-conflict growth has been buoyed by construction, which has increased its share of GDP from 6.6% in 2009 to 8.1% in 2012, and by transport and telecommunications, its share up from 12.8% to 14.3% in the same period. The government’s focus on infrastructure and post conflict reconstruction and development has supported this expansion and will continue to drive growth in the medium term. The expansion in tourism and related construction has been noteworthy and is reflected

Source:

in hotel and restaurant expansion, though modest scale limits the

Annual Report

contribution to growth. As tourist numbers continue to rise rapidly and

remittance inflows were increased labour migration under the profes-

large hotel projects in the pipeline open their doors, economic growth

sional and skilled category, the expansion of formal channels for

and foreign exchange earnings from tourism will continue to be

remitting money, and the introduction of a swift web-based money

buoyant over the next several years.

transfer system. These earnings held the current account deficit to an estimated US$ 1.4 billion, which is an estimated 2.0% of GDP and a

On the demand side, the investment ratio improved from 28% in 2010

marked improvement on the 6.6% deficit seen a year earlier.

to 31% in 2013. This gradual gain reflects the government’s infrastructure drive and the expansion in construction. The monetary policy relaxation will start to take effect on private sector credit around

Gross official reserves

mid-2014 and continue in 2015, facilitating private investment.

Amount

Import cover Months of imports

Moreover, foreign direct investment is expected to continue to expand as the economy strengthens and the investment climate improves.

Exports, having recovered since mid-2013, will continue to expand.

With these factors pushing up income, private consumption will pick up after slowing down in 2013 and will contribute significantly to higher growth.

Growth is thus expected to accelerate to 7.5% in 2014 and maintain that rate in 2015. While high inflation has been a problem in the past,

Jan

Jan

Jan

Jan

Jan

Dec

Source: Central Bank of Sri Lanka. Weekly Economic Indicators.

Portfolio investments recorded a net inflow of US$ 269.9 million for the year, of which about half went into the Colombo Stock Exchange in the form of secondary market transactions. Foreigners’ monthly net purchases on the exchange were broadly stable throughout the year.

Foreign direct investment increased by 42% to US$ 870.1 millionin the first 9 months of 2013 from the corresponding period in 2012.

Financial account net inflows brought the balance of payments surplus to an estimated US$ 700 million. Consequently, Sri Lanka’s gross official reserves increased to US$7.2 billion in December 2013, equal to 4.5 months of imports.

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it has been contained below 10% since 2009. Inflation is expected to remain in the middle single digits in 2014 and 2015. Broadly stable international fuel and food prices will help to keep inflation in check over the next 2 years, assuming normal weather conditions. While high inflation in the past has been attributed to government’s borrowing from banks, among other things, improved fiscal discipline and a falling fiscal deficit have eased such inflationary pressures in recent years. As the pace of economic growth picks up, the central bank will use monetary policy to keep inflation acceptable. In January 2014, the bank compressed the policy rate corridor, now renamed the standing rate corridor, to reduce variability in the transmission of its policy intentions, and then continued with monetary easing. The standing lending facility rate (the upper band) was cut by 50 basis points to 8.0%, narrowing the corridor to 150 basis points from 200.

Credit to the private sector, which decelerated throughout 2013, will

Economic Overview – Sri Lanka, Asian Development Bank

Contd.

expand in 2014 by 16%, according to central bank projections.

Exports

However, broad money is expected to grow at a slower pace as credit

performance in the European Union and the US, Sri Lanka’s main

demand from the public sector declines. Average inflation in 2014 is

export destinations. After declining in 2013, imports will pick up in

expected to fall to 5.0% from 6.9% in 2013, and then accelerate

2014 as domestic demand normalizes. However, policy measures

slightly to 6.0% in 2015. The fiscal deficit steadily shrank to 5.8% of

taken to limit food imports to support local production will affect

GDP in 2013 from a peak of 9.9% in 2009. The government has

imports in the medium term. Measures that helped improve remittanc-

deployed both revenue measures and expenditure reduction to

es will continue to bolster such inflows in 2014 and 2015. The current

narrow the deficit. However, the revenue ratio - tax collections as a

account deficit is projected to widen from an estimated 2.0% in 2013

percentage of GDP - has not picked up as expected, so deficit

to 2.6% in 2014 and 3.5% in the following year.

are

expected

to

strengthen

with

better

economic

reduction has been achieved mainly by rationalizing expenditure. The government expects the deficit to narrow further over the medium term. The 2014 budget estimates the deficit at 5.2%, with a higher revenue ratio and expansive 16% growth in expenditure. Better economic performance and more imports will catalyse higher revenue

POLICY CHALLENGE - BOOSTING FISCAL REVENUES Government finance

collection in 2014 and 2015, but continued policy action is also needed, together with improved revenue administration, to achieve a higher revenue ratio. Some measures are being introduced through the 2014 budget to broaden the revenue base, such as expanding

Budget deficit Expenditure Revenue excluding grants

the nation building tax to the financial sector and lowering the VAT threshold for retail and wholesale trade. The nation building tax is an indirect tax that has been levied since 2009 to help finance the rehabilitation of conflict damage; it is passed on in the price of goods or services sold.

Current account indicators Imports Exports

Current account balance

Budget estimate Source:

Annual Report

Sri Lanka has been focusing on fiscal consolidation and has been taking many steps in recent years to improve revenue collection.

However, the revenue ratio excluding grants remains low, at 13.6% of GDP in 2013.

In fact, it has fallen over the past few years, underperforming its target Forecast Note: Source:

each year. As the government continues its fiscal consolidation, reversing the revenue ratio’s declining trend is critical.

Annual Report

GDP share of tax revenue One risk to achieving the targeted revenue ratio is that the measures

The main cause for the erosion of the revenue ratio has been the VAT,

to expand the revenue base may take effect more slowly than

which accounts for 25% of tax revenue. VAT revenue has declined

anticipated. If revenue collection is lower than anticipated, the capital

from 5.8% of GDP in 2004 to 2.7% of GDP in 2012. The VAT was

budget will be hard pressed to meet its target of 6%-7% of GDP, as

introduced in 2002, replacing the goods and services tax with rates of

expenditure rationalization is already substantial in the 2014 budget

0%, 10%, and 20%. There are many exemptions: food such as rice,

and 2015 projections.

wheat, tea, and domestically produced sugar; machinery, including

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Economic Overview – Sri Lanka, Asian Development Bank

Contd.

strengthening institutions and improving administration can increase

Value-added tax Excise tax Income tax, etc.

Taxes on foreign trade Others

tax capacity. With regard to efforts at fiscal consolidation, so far the reduction in the deficit has come about mainly by rationalizing expenditure. However, improving the revenue ratio is key to reining in the fiscal deficit to a sustainable level and ensuring that public investment is not curtailed. As interest payments are a large drain on Sri Lanka’s budget, higher revenue collection will contribute to lowering the borrowing requirement and future borrowing costs to the government.

The government recognises the importance of improving the revenue ratio and has set up a tax reform committee. The committee submitted reform recommendations in 2009 that were first introduced through the 2010 budget. The major tax reform in 2011 reduced rates as it sought to broaden the tax base. Many rationalization measures were introduced, including simplifying the economic service charge (a tax

Source: Central Bank of Sri Lanka.

withholding system) and lowering the tax slabs of the personal income tax. In 2013, the government expanded the VAT base by bringing in the retail trade, which had been exempt. The 2014 budget introduced

that for agriculture and construction; and other items such as crude oil, diesel, kerosene, liquefied petroleum gas, electricity, and public transportation. The VAT Act has been amended many times since 2002, mainly to improve collection. However, VAT collection has

further measures to expand coverage and lower the threshold for certain taxes, such as expanding the nation building tax to the financial sector and lowering the VAT threshold for the retail and wholesale trades.

relentlessly declined, affected by exemptions, the unification of the rate at 12% in 2011, and the poor performance of imports since 2009.

The government has brought the Board of Investment under the Inland Revenue Act in an effort to limit exemptions and tax holidays provided

In the context of faster growth reached in the post-conflict years and increased income per capita, the low revenue ratio implies that revenue generation has not kept pace with the rising capacity of the population to pay. Average tax buoyancy—how well revenue mobilization tracks GDP growth—has hovered for the past 5 years at 0.78, which is significantly below unity. This indicates that tax collection has been unresponsive to the pace of economic expansion. A study

to new companies that apply for incentives. Many existing concessions are ending in the near future, which will broaden the tax base.

The government expects the reforms introduced in recent years to contribute to a higher revenue ratio in 2014. It is currently being implemented in the Inland Revenue Department the new revenue administration information system to make revenue collection more efficient.

released in 2013 by the International Monetary Fund entitled Understanding Countries’ Tax Effort estimates Sri Lanka’s tax capacity at 21.9% of GDP, one of the lowest in South Asia. This suggests that

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Source: www.adb.org

Moody's: Outlook for Sri Lanka banking system: stable GLOBAL CREDIT RESEARCH Singapore, July 03, 2014

growth is Sri Lanka's high current account deficit and a resulting reliance on external debt capital flows. This structural weakness exposes the economy and currency to shifts in investor sentiment,"

Moody's Investors Service says that the outlook for the Sri Lankan

says Vadlamani.

banking system is stable, as the economy - now recording a GDP growth rate of 7% - remains one of Asia's fastest growing economies.

However, in this context, the Moody's report notes that Sri Lanka's banks and sovereign have been able to access the international debt

"Since the end of the long civil war in 2009, the country has been

markets at relatively attractive yields, compared to past averages, over

rebuilding, and a pipeline of infrastructure projects is expected to

the last year, indicating the high confidence of foreign investors in the

boost economic growth, together with an accommodative monetary

economy.

policy. In such an environment, loan growth will rebound and asset quality will stabilize" says SrikanthVadlamani, a Moody's Vice President

On the issue of pawning loans, the report says that non-performing

and Senior Analyst.

loans (NPLs) - which had risen because of the widespread use of these gold-secured loans - should stabilize after a sharp increase in

"Our stable outlook for the Sri Lankan banking system is also consist-

2013.

ent with our stable outlook on the Sri Lankan government's B1 rating," says Vadlamani.

"We note that lending standards have tightened and, given that these loans have a tenure of only around 12 months, we expect NPLs in this

Vadlamani was speaking on the release of Moody's "Banking System

segment to start stabilising from around the third quarter of 2014,"

Outlook Sri Lanka", which is Moody's first banking system outlook for

says Vadlamani.

Sri Lanka.

Moody's rates two of the 10 largest banks in Sri Lanka by assets. The The report - whose outlook expresses Moody's expectation of how

two - Bank of Ceylon and Hatton National Bank - accounted for about

bank creditworthiness will evolve in this system over the next 12-18

30% of system assets in March 2014. The 10 largest banks together

months - looks at Sri Lanka's banking system in terms of five factors:

represent 87% of banking system assets.

operating environment (which is classified as "stable"), asset quality and capital ("stable"), funding and liquidity ("stable"), profitability and

The rated banks' baseline credit assessments (BCA) are in the b1-b2

efficiency ("stable") and systemic support ("stable").

range, corresponding to a bank financial strength rating (BFSR) of E+.

"Our analysis estimates 14% loan growth this year and we do not view

Source: www.moodys.com

this as excessive. Instead, the key risk to the outlook for economic

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Manager of the Fund CEYLON ASSET MANAGEMENT – BOARDOF DIRECTORS Piyadasa Kudabalage - (Chairman)

Sivendran Vettivetpillai

BCom, FCA, FCMA, FCPM. Managing Director of

CFA, USA. Bachelor of Engineering, (Hons) from

Sri Lanka Insurance Corporation Ltd., Managing

Imperial College, London. Partner, Abraaj Group,

Director/Chief Executive Officer of Litro Gas

UK (a Global Private Equity Company). Member

Lanka Limited and Executive Director of Peoples

of Executive and Investment Committees and

Bank. He has over 30 years of experience and

Chairman of the Partners Council. Has over 20

has held several senior positions with reputed

years of Private Equity investing experience.

companies.

Former CEO of Aureos Advisers Ltd.

Dulindra Fernando - (Managing Director)

Ravi Fernando

CFA, USA. A member of the Institute of Chartered

MBA, University of Colombo. Fellow of the

Accountants in Australia (CA). Bachelor of

Chartered Institute of Marketing, UK. Post

Economics, Monash University, Australia. Former

Graduate Certificate in Sustainable Business and

CEO of MAS Investments. The Founder of Ceylon

Masters

Asset Management.

Cambridge University.

Strategic

in

Sustainability Corporate

leadership

from

Guest Lecturer on Sustainability

at

INSEAD-AMP, France and University of Deusto, Spain.

Michael Preiss

Roshan Egodage

Chartered Wealth Manager. A Graduate of the

CEO of Commercial Credit PLC. BSc. Eng.

European Business School with a major in

(Hons) degree from University of Peradeniya,

Finance and International Economics. A guest

MBA from University of Colombo. FCMA,

commentator on International Business TV and

Dip.M(UK), ACIM and ASCMA.

newspaper

columns.

Emerging

market

investment advisor in international banks in Dubai, Hong Kong, Singapore and London.

INVESTMENT COMMITTEE Dhanuka Liyanagamage, CFA Assistant General Manager, Investments - Sri Lanka Insurance Corporation Ltd.

Dulindra Fernando, CFA Managing Director - Ceylon Asset Management

Michael Preiss, CWA Economic Advisor - Ceylon Asset Management

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15

General information of the fund Investment Rationale

Taxation

The fund aims to provide US Dollar returns by investing in Sri Lankan

All capital gains and income distributions earned by unit holders are

sovereign bonds, bank and corporate dollar bonds, rated and listed

exempt from tax in Sri Lanka. The fund will pay a tax rate of 10% on

on recognised global stock exchanges. The fund risk is limited to

net income earned by the fund. Information is based on the latest

sovereign risk and bank guaranteed risk whilst avoiding exposure to

amendments to the Inland Revenue Act at the time of printing this

Sri Lankan rupee currency risk.

document. Investors who are in doubt as to their tax position should consult their tax advisors on the implications of investing and

Following the array of recent high yielding Sri Lankan Dollar Bond

disposing of units.

issues, foreign investors can now gain diversified exposure to Sri Lanka issued dollar debt securities via the Ceylon Dollar Bond Fund.

Foreign investors are also exempt from income or with holding tax on returns earned from the fund.

The Dollar fund launch follows the success of the “AAA” rated Ceylon Gilt Edged Fund and the “A-” rated (by Fitch Ratings) Ceylon Income

Eligible Investors and Repatriation

Fund managed by Ceylon Asset Management.

This Fund will be only eligible for the following investors in foreign currencies:

The Ceylon Gilt Edged Fund, rated “AAA” was the best performing Gilt

a) Foreign citizens

Edged Fund in Sri Lanka in 2013. Ceylon Income Fund is the first

b) Sri Lankan diaspora with foreign citizenship

corporate debt fund to be rated in Sri Lanka. It received an “A-” rating

c) Companies registered outside Sri Lanka

from Fitch Ratings upon the strength of underlying ratings of individual

d) Foreign fund managers

debt issues, security backing and duration matching techniques

e) BOI companies

employed. The fund was the best performing fixed income fund in Sri Lanka during 2010, 2011 and 2013 Q1.

Foreign investors are free to repatriate dollar capital and profits without restriction.

Risk Factors Being invested in listed bonds, the fund is exposed to the financial and

Investment Restrictions

rated credit risks of the individual issuers and trading price volatility of

The manager will make investments within the parameters set out by

the bonds on the listed exchange.

the Securities and Exchange Commission of Sri Lanka (SEC), directives and guidelines issued by the SEC from time to time as well

Nevertheless, the fund invests only in dollar denominated bonds

as the unit trust deed of the fund. Unless permitted by the SEC, the

issued by Sri Lanka that are rated by an international rating agency.

manager will not make the following investments:

This risk is diversified with a maximum exposure limit of 25% for each

A. Any investment for the purpose of gaining management control of a

individual issuer. Liquidity is provided by bonds traded and respective

company.

market makers on the US Dollar denominated Singapore Stock

B. Any investment in equity shares.

Exchange and other recognised Stock Exchanges.

C. Any investment that involves the trust in unlimited liability.

D. Leverage by borrowing against securities or buying on margin.

Income Distribution Policy

E. Make loans or act as a guarantor or indemnify any person.

Distributable income will be derived principally from interest earned

F. Underwrite securities

and realised capital gains. Net income will be distributed at the

G. Investment in commodities

discretion of the manager, after satisfying operating expenses of the

H. Investment in real estate.

fund. All such income distributions are tax exempt in Sri Lanka.

Investors have the option to re-invest their distribution in units of the

Please refer to the trust deed for more information on investment

funds. Investors selling units before distributions can realise interest

restrictions.

earned in the form of capital gains.

Page

16

General Information of the fund

Contd.

The following fees will be charged at cost from the Fund:

– Management fees • 0.25% p.a. on assets under management – Trustee and Custodian fees • 0.165% p.a. on assets under management – Front-end fee • 0.1%

Details of Other Administrative and Professional Expenses Payable by the Fund *Any cost including legal fees incurred in preparation and modifying the unit trust deed. *All professional fees including audit, tax and rating agency fees. *Any taxes, stamp duties, brokerages, commissions (not including commission to agents), bank charges and other duties payable on the trust deed in connection with or arising from the establishment, execution, management or termination of the trust. *Cost of printing and distributing dividend warrants, and accounts and reports of the trust. *Any cost incurred in respect of meetings of unit holders. *Costs incurred in preparing and publishing communications to unit holders. *All other charges or fees expressly authorised by the trust deed or by law, any or all of which may be discharged out of the deposited property of the trust.

Rights of Unit Holders * To redeem units registered in their names. * To receive annual accounts, as at 31st December and the report of auditors. * To receive half yearly reports on the accounts and performance of the fund. * To participate and vote at a meeting of the unit holders. * To transfer units on the payment of a US$ 10/- fixed fee.

For further information and clarifications of provisions appearing in the Information Memorandum, investors may inspect the Trust Deed of the unit trust and the Memorandum & Articles of Association of Ceylon Asset Management Company Limited free of charge at the business office.

Reports and Accounts Annual accounts will be prepared up to 31st December and will be distributed amongst the unit holders within three months of the end of the said date. Investors will be provided with half yearly reports on the accounts and the performance of the fund within three months of the period covered. An interim report for the first half-yearly accounting period shall not be prepared; in the case such period is less than six months.

Suspension of Dealings The manager may, with the approval of the trustee and the Securities and Exchange Commission of Sri Lanka, suspend the dealings during: *Any period when the dealings of the Singapore Stock Exchange is restricted or suspended. *The existence of any state of affairs during any period, which, in the opinion of the manager, would be detrimental to the interests of the unit holders. *Any period during which there is a breakdown of communication in determining the prices of their investments. *Such suspension shall take effect immediately upon declaration thereof by the manager subject to the provisions of the trust deed, and shall terminate, once the manager is satisfied that the conditions giving rise to such suspension shall have ceased to exist.

Page

17

Investment and Redemption The fund, managed by Ceylon Asset Management Company Limited (CAM) is regulated by the Securities and Exchange Commission of Sri Lanka (SEC) Act No. 36 of 1987 and amended by Act No. 26 of 1991 and Act No. 18 of 2003. The trustee and custodian of the investment fund is Deutsche Bank AG, Colombo Branch.

Minimum Investment

Valuation of Units

Applications for units could be for any amount subject to a minimum

The price at which investors may subscribe for or redeem units is

value of US$ 1,000/-. The investment will be divided by the manager's

calculated on each dealing day. In calculating a unit price, the Net

selling price to determine the number of units allotted.

Asset Value (NAV) of the fund is ascertained daily (after adjusting for charges) and divided by the number of units in issue.

Payment You may apply for units and make payment by telegraphic transfer,

Redemption of Units

cheque or bank draft crossed “A/C Payee Only” made payable to:

Units can be redeemed with a written request to Ceylon Asset Management at the manager’s buying price published on each

“Ceylon Dollar Bond Fund” and deposit in:

dealing day. Where a unit holder wishes to redeem units which

A/C No: 2523710 - 08 - 1 Deutsche Bank, Singapore Branch

constitutes an aggregate of three percent (3%) or more of the units of

SWIFT Code: DEUTSGSG

that fund, such holder shall give the manager at least fourteen (14) days written notice in advance. Payment of redemption proceeds in

“Ceylon Dollar Bond Fund” and deposit in:

foreign currency will be made by telegraphic transfer by Deutsche

A/C No: 042242007 Deutsche Bank, Colombo Branch

Bank AG, within 14 business days from the date of receipt of

SWIFT Code: DEUTLKLXXXX

instructions for redemption.

Ceylon Asset Management Company Limited does not accept cash.

Please read the application form at the back of this Information Memorandum for further details.

Allotments Allotment of units will be made after the monies being realised by Deutsche Bank or the application received at the office of Ceylon Asset Management Company Limited, whichever is later. Dealing is carried out daily. Where this falls on a holiday, the next market day is considered to be the dealing day.

DISCLAIMER & DISCLOSURE Please note that prices, valuations and rates as indicated in this document are valid as at July 16, 2014 and are subject to change on a daily basis. Investors are advised to refer the newspapers, contact Ceylon Asset Management or log on to www.ceylonam.com for up-to-date values.

The unit trust is regulated by the SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA Act No. 36 of 1987 and amended by Act No. 26 of 1991 and Act No. 18 of 2003

Page

18

Key Information FUND MANAGER & FUND REGISTRAR

TRUSTEE & CUSTODIAN

Ceylon Asset Management Company Ltd.

Deutsche Bank AG

281, Union Place,

Trust & Securities Services

Colombo 2,

Colombo Branch

Sri Lanka.

86, Galle Road,

Company Registration No: P B 995

Colombo 3,

A venture between Sri Lanka Insurance Corporation Ltd.

Sri Lanka.

(22.5%), Ceylon Capital Trust (Pvt) Ltd. (67.5%) and Commercial

Deutsche Bank, Sri Lankan branch is a fully owned branch office

Credit PLC (10%).

of Deutsche Bank, Frankfurt.

AUDITORS

LAWYERS

Ernst & Young

Nithya Partners

201, De Saram Road,

Attorneys at Law

Colombo 10,

97A, Galle Road,

Sri Lanka.

Colombo 3, Sri Lanka.

This document does not constitute an offer or solicitation to anyone in

The board of directors of the managing company hereby declare that

any jurisdiction in which such offer or solicitation is not authorised or to

it will carry out the transactions with the trustee at arm’s length basis

any person to whom it is unlawful to make such offer or solicitation and

and on terms which are best available for the fund, as well as act, at

may be used only in connection with this offering of units to which it

all times, in the best interests of the fund's unit holders and also that

relates by distributors as contemplated herein.

the requirements of the guidelines have been compiled with.

“The board of directors of the trustee hereby declare that it will carry

“This Information Memorandum has been seen and approved by the

out the transactions with the managing company at arm’s length basis

directors of the managing company and they collectively and individu-

and on terms which are best available for the fund, as well as act, at

ally accept full responsibility for the accuracy of the information given

all times, in the best interests of the fund’s unit holders and also that

and confirm that, after making all reasonable inquiries to the best of

the requirements of the guidelines have been compiled with. The

their knowledge and belief, there are no other facts, the omission of

trustee further certify that it has read and agrees with the

which, would make any statements herein misleading.”

representations contained herein.”

Authorised Signatory Authorised Signatory On behalf of the board of directors of the trustee

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19

On behalf of the board of directors of the managing company

Investor Application Form

Ceylon Asset Management Co. Ltd. 281, Union Place, Colombo 2, Sri Lanka. +94 (11) 739 4000 / +94 (71) 703 0000 www.ceylonam.com, cdbf@ceylonam.com

Office use only Type of Account

Corporate

Joint Account

Sole Account

Agent Code: Account No:

First Applicant

Please fill in BLOCK letters

Title

Company

Mr

Mrs

Joint Applicant Ms

Dr

Mr

Mrs

Ms

Dr

Full Name of the Investor

Date of Incorporation / Date of Birth

D

D

M

M

Y

Y

Y

Y

D

D

M

M

Y

Y

Y

Y

Company Registration No / Passport No Nationality Permanent Address*

Country Postal / Zip Code Correspondence Address (If different to above)

Country Postal / Zip Code *Status of above Permanent Address

Office

Owner

Lease / Rent

Other

Contact Details

Office

Owner

Lease / Rent

Other

E - Mail Address**

E - Mail Address**

Office/Home Tel No.

Office/Home Tel No.

Mobile No.

Mobile No.

**A monthly account statement will be sent to the email address Investment Details Investment Amount

/

Currency

Fund Transfer

Cheque deposit

Agents are not authorised to accept Cash

Cheque No Amount in words

Bank & Branch

Investor Information Required - KYC First Applicant

Joint Applicant

Source of funds Corporates

Corporates

Sales / Business Turnover

Profit/Capital

Sales / Business Turnover

Individuals

Profit/Capital

Individuals Savings

Salary / Professional Income

Salary / Professional Income

Other (please specify)

Savings

Other (please specify)

Occupation

Occupation

Bank Account Details of Source of Funds Bank Name & Branch Adrees

A/c No

Account Type

Applicable for joint applicant Relationship to the First Applicant Spouse

Marital Status

Single

Married

Marital Status

Spouse Name

Spouse Name

Occupation

Occupation

Family

Other

Single

Married

Declaration I/We hereby declare that the details furnished above are true and correct to the best of my/our knowledge and belief and I/we undertake to inform you of any changes therein, immediately. In case any of the above information is found to be false or untrue or misleading or misrepresenting, I am/we are aware that I/we may be held liable for it.

Signature

D

D

M

M

Y

Y

Y

Y

Signature

D

D

M

M

Y

Y

Y

Y

Instructions 1. Investment Process

2. Redemption Process

A)

A) Redemption request should be made by the investor via e-mail, with a copy of a scanned signed letter to cdbf@ceylonam.com or posting the originals.

B)

Applications are available at www.ceylonam.com or Ceylon Asset Management Co. Ltd., 281, Union Place, Colombo 02, Sri Lanka.

Please submit the following documents along with the application form: Corporate Investors

B) Corporates must sign under the seal as provided in the Letter of Authorisation

-

Copy of Certificate of Incorporation

-

Copy of Board Resolution as per the Articles of Association

C) In case of a ioint account, both first & joint applicant should sign D) the redemption request.

-

A letter of Authorisation with specimen signatures and company seal to operate the investment

D) Units will be redeemed based on buying price of the day the redemption request is received.

-

Passport copies of Authorised Signatories

E)

Funds will be remitted to the source bank account of the orginal investment

F)

For querries, please contact us on cdbf@ceylonam.com or 0094 11 739 4000

Individual Investors

C)

-

Copy of the Passport

-

Billing proof of Address

Transfer funds to : Account Name :

Ceylon Dollar Bond Fund

Bank

Account Number

Deutsche Bank, Singapore

2523710-08-1

DEUTSGSG

Deutsche Bank, Sri Lanka

042-242-007

DEUTLKL

SWIFT Code

281, Union Place, Colombo 02, Sri Lanka.

Tel: +94 11 739 4000 Fax: +94 11 739 4007 E-mail: info@ceylonam.com Web: www.ceylonam.com

The 1st Dollar Fund offer in Sri Lanka

CEY ON BOND FUND INFORMATION MEMORANDUM July 2014