Sri Lanka reaches provisional deal with bondholders

July 4, 2024 at 10:31 AM

Sri Lanka has successfully concluded discussions with the ad-hoc Bondholder Committee of International Sovereign Bonds (ISBs), reaching an agreement on restructuring terms, State Minister of Finance Shehan Semasinghe announced on Thursday. 

Taking to ‘X’, State Minister Semasinghe revealed that International Sovereign Bonds account for USD 12.5 billion out of the total external debt of USD 37 billion. 

The State Minister pointed out that this agreement is a crucial step in our efforts to restore debt sustainability in the country. 

He further said that these restructuring terms now require approval from the official creditor committee and the International Monetary Fund (IMF) to confirm the Comparability of Treatment and assess compliance with Debt Sustainability targets. 

“This marks another key milestone in our journey towards economic revival and strengthening. This milestone could be considered a reflection of the ambitious economic and governance reforms carried out by the government in line with the best practices adopted globally. These reforms have been pivotal in creating a more resilient and sustainable economic framework for the future,” he added. 

Sri Lanka defaulted for the first time on its foreign debt in May 2022 after its economy was driven to the brink by a slump in foreign exchange reserves.

Restructuring international bonds was one of the key conditions set by the IMF under a $2.9 billion bailout programme that helped Sri Lanka tame inflation, stabilise its currency, and improve public finances.

The latest agreement comes after Sri Lanka held a second round of formal talks with bondholders this week.

According to Reuters, the framework proposes a 28% haircut on face value and an 11% reduction on past interest with payments on the interest component to start in September. 

The outline proposes to swap four existing dollar-denominated bonds for a bundle of three fixed-income instruments. 

One is a standard or so-called “plain vanilla” bond that has a coupon of 4% and matures in 2028. The second is a series of macro-linked bonds, where payouts and principal will be adjusted according to the country’s economic performance – downwards in case the economy fails to hit the IMF baseline projections, and upwards if the economy outperforms.

A third instrument would be a so-called governance-linked bond. While the government’s regulatory statement did not detail the parameters to which the payout was linked, a source familiar with the situation said the country would have to pay investors less if it managed to achieve reforms demanded by the IMF and hit tax revenue targets.

The agreements come in the backdrop of Sri Lanka signing in late June an agreement with creditor nations including Japan, India and China to restructure about $10 billion in bilateral debt.

Sri Lanka now needs to present the proposal to all its bondholders who need to agree to the deal for the restructuring to be finalised.

The country, whose total external debt is $37 billion, also has to finalise arrangements with the China Development Bank to restructure debt of $2.2 billion, according to the latest finance ministry data. (Newswire)