Received call from Public Debt Dept canvassing 30 year Treasury bond:
Perpetual Treasuries Limited CEO Kasun Palisena told the Treasury Bond Commission yesterday that he considered the February 27, 2015 Bond auction was “extraordinary”.
Following an exceptional line of questioning carried out by the Commissioner Supreme Court Judge, Justice P.S. Jayawardena as to “why this auction was so extraordinary”, Palisena said he thought so because of the “change” of the government and its expectation for new economic policies following that political change.
When questioned by the Commission as to why Palisena decided to bid for such a large volume, when there was no particular reason or justification for such bidding, Palisena responded that the preceding change in policy and authority prompted the “risk”.
Excerpts of the exchange are as follows:
Commissioner Jayawardena: An average person, by February 27, 2015, will picture a situation where Rs 1 billion is advertised, the direct placement method playing dominant and auction not a frequent. So in a background as such, what is so special or new about the February 27, 2015 Treasury bond auction?
Palisena: It is the change, my lord. The change as in the change of a new government and we were expecting a change of policy from the government as well.
Commissioner Jayawardena: You said the government requirement was high due to the change of government. There was a new governor at the Central Bank. No policy announcement has been made up to this date (27 Feb.2015) by the Central Bank. No public advertisements published by the Treasury or the Central Bank on fiscal or monetary policy changes. So there was no official information for you to rely on. So what made you think there would be a change in the auction? Why did you think it would be extraordinary?
Palisena: As I explained to you earlier my lord, I was basing my rationalisation on several factors. There was a large government borrowing requirement. Then there was a telephone call from the Central Bank.The call was made by Tyrell Gunatilake who was at the Public Debt Department. He canvassed the 30 year Treasury bond to us. It established the fact that the government was desperate for money. Then of course I knew the government has not raised a single rupee via auction from December 2014 up until then. PTL was interested in investing in 30 year Treasury bonds. The government has used reserves for payments for the sovereign bonds.The prevailing Treasury bond rates were not a correct reflection of the actual market. We (PTL) were a ‘Price Maker’. At every prior 30 year bond issuance we have always bid over 11.00% rate. So I took the decision to bid above the 11.00% rate at the February 27, 2015 auction.
Commissioner Jayawardena: Now, there was only Rs 1 billion advertised. There was a new governor, and of course there was a new Superintendent of Public Debt. These were the only changes that have taken place up to February 27, 2015. Up until the said date, the practice was raising money through private placements.Auction was only to test the waters. I am not saying it was a good system. In fact there were lots of shortcomings in it. But that was what was available. So what made you think that the Central Bank will accept large volumes of bids at this auction? Why bid up to Rs 13.5 billion?
Palisena: Rs 500 million worth Sovereign bonds were paid using reserves.We didn’t see a FD payment, without raising a rupee. That is why I am saying the auction was extraordinary. But I did not mean it to be this February 27, 2015 auction. I was not specific on the date.
Commissioner Jayawardena: I still cannot see a justifiable reason of any use to bid as much as Rs 13.5 billion. I cannot see anything reasonable on the table.
Palisena: It all boils down to the yield my lord. I see PDD canvassing for a 30 year bond, government desperate for money. Then I offer my rate adding a premium.
Commissioner Jayawardena: Why would you think more than Rs 1 billion will be accepted when the practice was otherwise?
Palisena: I have seen Central Bank offered lower and accepted for higher. And it was quite evident that the government was desperate for money.
Justice Jayawardena: So you thought the Central Bank will do away with direct placement and accept your high rates?
Palisena: I didn’t think the direct placement method will be stopped.
Initially, mapping out reasons for PTL bidding aggressively at the questioned bond auction, Palisena told a Rs. 300 billion government borrowing requirement as at February 2015 compelled him to bid ten times the 1 billion worth of bonds advertised by the Central Bank on February 25, 2015.
According to Palisena, Rs. 300 billion borrowing requirement included,a total payment for maturing Treasury bonds and bills worth Rs. 212 billion, Sovereign bonds maturing worth Rs. 500 million, IMF trans-repayment from January-February 2015 worth Rs. 6.6 billion and allocations for the mini budget worth roughly a 52 billion.
At the initial stage of questioning, Justice Jayawardena asked Palisena to explain the portfolio of Perpetual Treasuries Limited as at February 2015.
According to the answers given by Palisena, by September 2014 PTL had 7.5 billion worth Treasury bonds and bills which the PTL liquidated in 12 November 2014. As at 31 December 2014, the PTL had 2.8 billion holding of Treasury bill and bonds. As at 31 January 2015, PTL has held 3.5 billion worth Treasury bills and bonds.
“So, in those circumstances, what could have prompted you to bid for 13.5 billion worth Treasury bonds?” Justice Jayawardena asked. Palisena said he was well aware of the large borrowing requirement of the government.
Justice Jayawardena then asked Palisena “if it was prudent to bid for Rs 13.5 billion with only a Rs. 1.40 billion capital as at February 27, 2015.” Palisena said he could have held on to his portfolio if they wanted to and thereby settled the dues.
He also went on to say that he had “other mechanisms” in his hands if there were any difficulty to pay for the bids.
“So what is this ‘other mechanism’ you are talking about?” Justice Jayawardena asked.
“I had selling and buying mechanism. We do sales with the promise of buying back.” Palisena said. “Isn’t it a repo?” Justice Jayawardena questioned back.
“Actually it is like a classic repo. It is a tool that I have used before. I had about three investment banks and two Primary Dealers who were willing to make actual repos with us. I previously did a Rs 190 billion actual repo with Bank of Ceylon.” Palisena explained.
“Isn’t this acual repo is like an outright sale? A holding of temporary arrangement?” Justice Jayawardena asked, to which Palisena answered in the affirmative.
Justice Jayawardena then went on to ask whether Palisena discussed about these TOM payments before 27 February 2015. “No, I did not. But I had them readily available.” Palisena said.
On the request of Justice Jayawardena, Palisena named the companies who were ready to sell and buy back with PTL.
“I had NDB Wealth Management, Bank of Ceylon, Wealth Trust Securities, DFCC, First Capital, Cey Bank Asset Management.” We called this Over Night Asset Facility or a swop.” Palisena explained.
“Does this mean these dealers will park money with you without parking money at the Central Bank overnight facility because they get a better return?” Justice Jayawardena asked, to which Palisena answered in the affirmative.
“So on what basis could you be confident you could raise about Rs 10 billion within a short period of time?” Justice Jayawardena asked. “So you had not discussed about such sale and buy arrangement before hand?” he continued. Palisena said he did not have prior arrangements and said he was confident he could have settled the Rs15 billion bids if they were accepted on that day.
Palisena went on to say that “if by any chance the PTL had received inside information on the questioned auction, they would not have bidded at that auction at all.” Palisena said they would have waited for the next auction of which the yield rate will be higher. Justice Jayawardena pointed out that, if such information was with PTL and all their Rs 15 billion bids were accepted, “You could have closed down your shop, gone home and wait for the money comes as the interest for the large volume.”
Palisena’s testimony will continue today. (10)