Explaining the dynamics of Perpetual Treasuries trading in the market, PTL Chief Executive Officer Kasun Palisena yesterday said the Treasury Bond Commission that “We (PTL) buy the rumours (in the market) and sell the news, whereas others wait to buy after the news.”
Palisena also said that he is able to pinpointedly predict government requirements up until 2045, if accurate details are available to him. He was testifying before the Presidential Commission of Inquiry investigating into the Treasury bond issue yesterday.
PTL lawyer President’s Counsel Nihal Fernando led evidence.
Fernando PC asked Palisena if it is possible for him to predict the government requirement for March 2018, to which Palisena replied in the affirmative. He said he would provide the commission with the details tomorrow.
“According to data provided by the Central Bank, which are in the public domain, we know that the government needs to pay for Rs 92.2 billion worth bonds plus their coupon rates by March 2018. So, altogether in March 2018, the government has to pay approximately Rs125 billion.” Palisena said.
“If the government does not raise money in any other manner or receive large investments or foreign aid, then we know for sure that the government needs this amount of money in a particular month. If one or more above mentioned have taken place, we can adjust our predictions accordingly.” Palisena explained.
Palisena, wording the aggressive approach followed by the PTL in the Treasury bond market told the PCoI that they look into maturities of Treasury bonds, Treasury bills, Sri Lanka Development Bonds and sovereign bonds as tools to make such predictions.
He also said the PTL financial analysts comb through the hints given to the money market through financial magazines and other informative websites both local and foreign, on a daily basis. “We derive information from websites belonging to IMF, World Bank, Asian Development Bank, Reserve Bank of India and more. The information is available. It is only a matter of looking for them.” Palisena said.
For example, Palisena said on February 18, 2015, Reserve Bank of India issued a one year one billion Treasury bonds to a weighted average cut off of 8.03676 where as on the same date Sri Lanka was trading a 10 year 1 billion bond at an 8.10 weighted average yield rate.
Palisena explained that when the math is properly done, they were able to predict that a 10 year Treasury bond will be closer to a 11.00 rate. “If our prediction to be wrong, either India’s rate has to go down or Sri Lanka’s rate has to go up.”
PTL CEO Palisena also said that there are “pioneers, followers and laggards in the market” and that PTL was scrupulously working to become a pioneer in the market. Commissioner Justice P.S. Jayawardena wondered “where we can place Employee’s Provident Fund?”. In between the three categories, pointed out Palisena.
Manipulated market rates
Palisena continuing his testimony told the Treasury Bond Commission that prior to 2015, both money market and the share market rates were artificially manipulated by parties who intervene the natural changes to these markets.
Palisena said, by the end of 2014 when the US Federal Reserve announced ending its quantitative easing (QE) stimulus programme which began in 2008, there was a 2.5 billion dollars worth capital outflow from the Sri Lankan share and money market. “Of the Treasury bond market the capital outflow (simply meaning foreign investors in Sri Lanka’s bond market, leaves it) by the end of 2014, was 700 million dollars.”
“Following the US Federal Reserve ended the QE in September 2014, entire world yield rates picked up. Since Sri Lanka was an emerging market, the effect was higher to us. However, contrary to the usual, Sri Lanka controlled its exchange by intervention and controlled its yield rates through auctions. Our foreign reserves drop from 7.5 billion US dollars to a 2.5 billion dollars. By the end of 2014, we were at a balance payment deficit.” Palisena explained.
The manipulated market got back to normal in February 2015, when the present government approached the International Monetary Fund and requested for a three year extended fund facility, Palisena further explained.
At the initial stage of his testimony, Palisena gave evidence on the business plan of the Perpetual Treasuries Limited which received its license as a Primary Dealer in 2013.
From the beginning, PTL addressed the need to invest in long term bonds, Palisena said. He said that PTL envisioned longer tenure bonds as an answer to stop the bunching effect (a large volume of Treasury bonds maturing on a same day, making it challenging to the government to pay all at once.)
Palisena pointed out Sri Lanka will have to face the biggest bunching of all history in the coming 2018 and 2019. Previous evidence led at the PCoI revealed that Sri Lanka will have to bear the brunt with the bunching of large dollar repayments for the international sovereign bonds which have been issued in years 2007 up until 2015.
While going through the PTL’s SWOT analysis included in its business plan, Commissioner Justice Jayawardena asked Palisena to describe what PTL meant by “(it) will promote secondary market in government securities using different techniques used in the equity market…”
Commissioner Jayawardena requested Palisena to be specific on the said “different techniques used in the equity market”, and referred to the Stock Market fiasco in 2012.
Justice Jayawardena then asked as to who was dealing in the equity market representing Perpetual Asset Management and Perpetual Capital Holdings. Palisena said “that would be Arjun Aloysius and Suren Muthuraja.”
“Did you know what happened in the share market in 2012?” Justice Jayawardena questioned Palisena. “Yes, I know.” Palisena replied.
Justice Jayawardena then asked if the term “different techniques used in the equity market” mean that the same tools used in the share market in and around 2012, will be used by the PTL in the government securities market as well. A clear answer was not provided by Palisena.
Justice Jayawardena pointed out that “allegations came out in 2012 about the techniques used in the share market by Perpetual Asset Management and several other companies.”
Palisena was also questioned by Nihal Fernando PC on the PTL’s rapid profits from its establishment upto 2014.
“We started with a capital of Rs 300 million in the company. By September 31,2014, our capital gain rose to Rs. 816 million. 85% of our trading was seven or more year long term bonds. Rs. 567 million of the 816, was by trading. Capital of the PTL by the same date was Rs 1.40 billion. It is a 400% increase of the initial capital the company had,” Palisena told the PCoI. Justice Jayawardena asked Palisena whether between the beginning of 2014 to beginning of 2015, former Central Bank Governor Ajit Nivard Cabraal’s sister Shiromi Wickremesinghe was a director of the PTL. Palisena answered in affirmative. Previous evidence led at the PCoI has pointed out that the relationship of Nivard Cabraal and his sister who is in the director board of a primary dealer is a conflict of interest.
Palisena pointed out to the PCoI that of 276 transactions done by the PTL in the bond market, only Rs. 2.5 billion was raised through direct placements.He highlighted that PTL was not an active player when the direct placement method was used at Treasury bond auctions. He also said PTL did not maintain an Investment Book where as it maintained a Trading Book.
According to evidence led at the PCoI yesterday, Palisena has chosen his staff by both advertising and head hunting. His PTL key staff members in 2013, included V. Jesudasan, Nuwan Salgado, Harin Nishanta, Nadeeka Jayasekara, Manju Priyadarshana, Upeka Samarasinghe and Nishanti Udawatta. These officers have five or more experience working for primary dealers and money brokers such as Aquity Securities, CIC Group, Capital Alliance and Natwealth Group.
“Where is Mr. Gajan?” Justice Jayawardena asked Palisena. Gajan Devarajan is the PTL Financial Analyst who attends commission proceedings daily and usually sits at the back row seats allocated for the public.
“Gajan came in 2016 as a dealer and our Financial Analyst.” Palisena explained.
“I see Mr. Gajan every day, so was interested in getting to know him.” Justice Jayawardena said. He also went on to ask “where is Muththu, who was your best man at your wedding.” Palisena told that he is working for another company.
Bit of Entertainment
While technical lingo dominated the proceedings, it was entertaining when a Sinhala proverb breezed in when DSG Milinda Gunatilake reserved his rights to question PTL Financial Analyst Gajan Devarajan, since he has prepared most of the documents submitted by Palisena.
Translating the proverb, Fernando PC said “this is like getting into your swimming suit way before the sea comes anywhere near vicinity” to which Justice Jayawardena promptly said “That is exactly what I meant when I said ‘Muhuda Hathgawuwak thibeth di” (wording of the original proverb in Sinhala).
DSG Gunatilake came back with a reply saying that “it (proverb) should be applicable to PTL for bringing in Mr. Gajan to the hearing from the beginning of the PCoI.”
Palisena will testify before the PCoI today as well.