Fitch rates Ceylon Gilt-Edged Fund ‘AAA(lka)’/’V1(lka)’

Fitch Ratings has assigned the Ceylon Gilt-Edged Fund a ‘AAA (lka)’ National Fund Credit Rating and ‘V1(lka)’ National Fund Volatility Rating. The fund is managed by Ceylon Asset Management (CAM). The ‘AAA (lka)’ National Fund Credit Rating is driven by the fund’s investment in government securities and repurchase agreements backed by government securities only. Fitch considers the national credit quality of Sri Lankan government securities to be AAA (lka).

The key rating driver for the ‘V1 (lka)’ National Fund Volatility Rating is the fund’s investment in government securities only, with a maximum maturity of one year. As a result, the fund incurs low interest rate risk and negligible spread risk in the context of the Sri Lankan market.

The portfolio is exposed to Sri Lanka government debt instruments and repo backed by government securities. Consistent with Fitch’s view that the credit risk of Sri Lankan government securities is AAA(lka) the fund is therefore of equivalent credit quality. Repo contracts are over collateralised and as at March 2013 the existing repo contract was over collateralised by 14%. Repo contracts are backed by government securities.

The fund invests only in short-dated government securities and repos backed by such securities. As a result in a national context its sensitivity to market risk is very low. The fund seeks to provide duration matched investment strategies for its investors, i.e. investors enter the fund with a specified maturity target which is matched to the maturity of securities in the fund.

These duration matched holdings are not subject to early redemption restrictions. Fitch considers, however, that the liquidity provided by the secondary market in Sri Lankan government debt and the 30 day advanced notice required for redemptions greater than 3% of fund assets is sufficient to make a ‘V1(lka)’ National Fund Volatility rating applicable.