The Sri Lankan government announced on Wednesday that it has secured a deal to restructure approximately $12.5 billion in international bonds. This marks a significant milestone in the island nation’s recovery from a severe financial crisis.
Sri Lanka defaulted on its foreign debt for the first time in May 2022 due to a dramatic decline in foreign exchange reserves. Restructuring these international bonds was a key requirement set by the International Monetary Fund (IMF) as part of a $2.9 billion bailout program. This program has helped Sri Lanka curb inflation, stabilize its currency, and improve public finances.
The agreement with selected bondholders, representing about 50% of Sri Lanka’s bonds, is contingent upon confirmation by the Official Creditor Committee (OCC) and the IMF. This ensures alignment with the IMF’s debt sustainability analysis for the country. The latest deal follows a second round of formal talks with bondholders held this week.
“Sri Lanka … looks forward to further constructive interaction to finalize the ISB (International Sovereign Bonds) restructuring,” the government stated in a regulatory announcement.
The restructuring framework proposes a 28% reduction in the face value and an 11% reduction in past interest, with interest payments set to commence in September. It outlines the exchange of four existing dollar-denominated bonds for a bundle of three fixed-income instruments.
The first is a standard bond with a 4% coupon maturing in 2028. The second consists of macro-linked bonds, where payouts and principal will adjust based on the country’s economic performance, decreasing if the economy falls short of IMF projections and increasing if it exceeds them. The third instrument is a governance-linked bond, which adjusts payouts based on the achievement of IMF-demanded reforms and tax revenue targets.
The bondholder group, the Paris Club, and the IMF did not immediately respond to requests for comment.
Sri Lankan sovereign dollar bonds saw a marginal increase in price on Wednesday, trading around 57 or 58 cents on the dollar. Year-to-date, the bonds have risen nearly 15% according to JPMorgan data.
In late June, Sri Lanka signed an agreement with creditor nations, including Japan, India, and China, to restructure approximately $10 billion in bilateral debt. The country must now present the restructuring proposal to all its bondholders for final approval.
Sri Lanka’s total external debt stands at $37 billion. The country also needs to finalize arrangements with the China Development Bank to restructure $2.2 billion in debt, according to the latest finance ministry data.
Source: Reuters
