By Shihar Aneez and Umesh Desai
COLOMBO/HONG KONG, Aug 26 (Reuters) - Sri Lanka's state-runNational Savings Bank (NSB) plans to raise a minimum $500million through the sale of a likely five-year bond with atarget yield around 7 percent, sources close to the deal toldReuters on Monday.
The bond would offer investors a similar yield compared withthe Bank of Ceylon bonds due 2018 with amid-point yield of 7 percent, although analysts say the NSBpaper should offer a higher yield.
According to the sources a final decision on size of the NSBbond and tenure will depend on market appetite.
"It will be a minimum of $500 million with minimum five-yeartenure, but depending on the market appetite, the size andtenure will be decided," one source said on condition ofanonymity.
"Currently the markets are highly volatile. Our currentbonds in the secondary market are trading around 7 percent. Thatgives some kind of a signal on the yield."
The U.S. Federal Reserve's plan to trim its stimulus,perhaps as early as next month, has seen a selloff in emergingmarket bonds with cash flowing out toward dollar-denominatedassets amid a rise in U.S. treasury yields.
Corporates selling global bonds are having to offer higheryields in order to attract capital.
"It could also appeal to investors looking to move down thespectrum," said a Singapore based fund manager referring tofixed income investors looking to increase returns by buyinghigher yielding, lower rated bonds.
The bank, which had originally targeted $1 billion, 10-yearbond, has appointed Citibank, Barclays, and HSBC as the leadmanagers for the lender's first global corporate bond and willstart roadshows on Monday in New York and will meet investors in Boston, Los Angeles and London this week.
The roadshows will end on Sept 3 in Singapore after meetinginvestors in Hong Kong next week.
A second source confirmed the NSB's bond sales plans anddetails. The capital is being sought to fund the Sri Lankangovernment's infrastructure projects.
The bonds offer an additional choice to investors who haveexposure to debt from Sri Lanka while the indicated yield wouldgive investors a pick-up over current bonds from sub-investmentgrade banks, fund managers said.
"It is a high yield lender which will appeal to investorswho are looking at bonds that pay a premium over other savingsbank, commercial bank or state banks and besides there aren'ttoo many banks in the high yield space," said the fund managerin Singapore.
At a yield of around 7 percent the bonds would not becompetitive against Bank of Ceylon's existing 2018 bonds andanalysts say NSB would be expected to pay a premium because ofits smaller profile relative to Bank of Ceylon.
"BOC commands a finer pricing because it is the largestbank. In this environment you need to give 20-30 bps new issuepremium and if it is not as strong as BOC, it will be another20bps," said a Singapore based credit analyst.
Although the banks have similar ratings, Bank of Ceylon isthe bigger of the two and analysts say investors would expectNSB to pay a higher yield on that count.
Bank of Ceylon is rated BB- by Fitch and B1 by Moody's. NSBis rated BB- by Fitch. All ratings have a stable outlook.
The bank's decision to tap the international market comes ata time the Sri Lankan government has decided against going foran international sovereign bond this year after sellingeurobonds for three consecutive years.
NSB is the only bank whose deposits are fully guaranteed bythe government.
The bank's investments in government securities accountedfor 72 percent of its total deposits of 422.06 billion rupees($3.31 billion) as of Sept. 30, 2012
Barclays (BARC)