Debt deal results in 50% drop in NPV: Capital Alliance

Capital Alliance (CAL), in its analysis on the deal struck by the government with Sri Lanka’s external private creditors, said that the combination of principal haircut, interest rate reduction and maturity extension, results in an approximate 50 percent drop in NPV. This is if the economy performs in line with the IMF expectations.
However, it noted that the IMF’s gross domestic product (GDP) forecasts appear to factor a somewhat unrealistic exchange rate assumption of Rs.400 per US dollar by the year end. 
“Assuming we do better than the IMF predicts, the payments ratchet up and the NPV reduction could be as little as 30 percent in a ‘best-case’ scenario,” said CAL Group CEO Kanishke Mannakkara.“But in fairness, in a best-case scenario for the economy, Sri Lanka’s GDP will also be higher and we will have a higher debt service capability,” he added. 
Sri Lankan bonds are trading at approximately 60 cents to the US dollar in the secondary market, indicating a market consensus that the actual outcome will be partway between the ‘base-case’ and ‘best-case’ scenarios. 
Mannakkara went on to note that this creates a large potential profit for the local banks in Sri Lanka. “Their (significant) investments in Sri Lankan ISBs have already been written down by 50 percent. Those bonds can now be sold in the market for 20 percent more than their written down value,” he said.