Fitch Ratings has affirmed the Ceylon Dollar Bond Fund’s International Fund Credit Quality Rating at ‘B+f’ and Fund Market Risk Sensitivity Rating at ‘S5’. The fund is managed by Ceylon Asset Management (CAM).
The fund has a limited investment space, as it only invests in US dollar bonds issued by the government of Sri Lanka (B+/Stable), licensed banks in Sri Lanka and Sri Lankan corporates that are rated by an international rating agency.
This restricts potential investments to 15 listed issuances totalling around USD10bn as well as Sri Lanka Development Bonds (SLDBs) of around USD4bn. SLDBs are unlisted, unrated US dollar bonds issued by the government domestically. The fund’s portfolio comprises of four bonds - all rated ‘B+’ - that have been issued by the entities detailed above and is mainly exposed directly to government and to government-guaranteed debt.
The fund currently has a large cash balance (19% of portfolio), which the manager expects to invest in the near-term and maintain around 5%-6% of the portfolio in short term US-dollar fixed deposits in a licensed commercial bank in Sri Lanka.The portfolio is concentrated and has a large exposure to Sri Lankan sovereign risk. The concentration risk is a structural feature given the limited opportunities in the fund’s investment universe.
The Fund Market Risk Sensitivity Rating is based on an analysis of the fund portfolio’s interest-rate and spread duration. Based on the fund’s market risk factor alone, it could achieve a ‘S4’ Fund Market Risk Sensitivity Rating. However, in affirming the rating at ‘S5’. According to Fitch’s criteria, funds rated ‘S5’ are considered to have high sensitivity to market risk.
The fund currently has a weighted-average life of 1.3 years due to the large cash balance it maintains in short-term deposits. The fund will rely on secondary market liquidity to meet large redemption requests.
CAM is 21%-owned by Sri Lanka Insurance Corporation Limited (SLIC, B+/Stable), 69% by Ceylon Capital Trust (Pvt) Ltd and 10% by Commercial Credit and Finance PLC (CCF). Fitch believes CAM has shareholder support, but a key challenge will be demonstrating sustained growth in assets under management. The Ceylon Dollar Bond Fund is a key component of its growth strategy.