Bondholders breakthrough before Presidential election

• Sri Lanka has almost completed its sovereign debt restructuring exercise
• Agreement includes the incorporation of governance-linked bond features into the terms of a plain vanilla bond instrument
• Overall, Sri Lanka will have obtained over US$ 17 bn of debt service relief during the IMF programme period

Sri Lanka managed to make a significant breakthrough just days before the presidential election as it reached an agreement in principle with the bondholders.

The Ministry of Finance announced yesterday that it has reached agreements in principle on the restructuring of approximately US$ 14.2 billion of sovereign debt (as of end 2023) with the holders of its International Sovereign Bonds (ISB).

The agreement in principle was reached with the Adhoc Group of Bondholders and Local Consortium of Sri Lanka (LCSL). With this development, Sri Lanka has almost completed its sovereign debt restructuring exercise, as agreed under Sri Lanka’s IMF-supported Programme to restore debt sustainability.

Discussions with restricted members of the steering committee included the incorporation of governance-linked bond features into the terms of a plain vanilla bond instrument, which forms part of the revised debt treatment plan.

“It has further been agreed that the local option would be offered to all holders of the bonds, subject to a cap tentatively set at 25 percent of the aggregate outstanding amount of the bonds, with priority given to local holders of the bonds, and pro-rata allocation of the balance between consenting international holders of the bonds who have opted for the local option,” the government said in a statement.

Sri Lanka has also advanced talks and reached an agreement in principle with restricted members of the steering committee on specific non-financial provisions related to the bond restructuring. These provisions include a loss reinstatement clause, a most-favoured creditor clause, and ongoing information disclosure requirements.

Sri Lanka and the LCSL have agreed that the US$ bond will include a provision allowing Sri Lanka the option, at its sole discretion, to make debt service payments in local currency (LKR) instead of US$ at the prevailing exchange rate, if the country determines it is unable to make payments in US$ on the due dates.

Sri Lanka, having received informal confirmation from IMF staff during the restricted period, now expects formal confirmation that both the agreement in principle and the local option are fully in line with the parameters of its IMF-supported programme.

Simultaneously, Sri Lanka will continue to work with the Official Creditor Committee (OCC) and its Secretariat to confirm that the agreement and local option comply with the Comparability of Treatment principle. Once these confirmations are received, Sri Lanka has committed to making its best efforts to expedite the bond restructuring process, the government said.

Overall, with the agreements already achieved with Eximbank of China and members of Sri Lanka’s Official Creditor Committee (OCC) as well as CDB and bondholders, Sri Lanka will have obtained over US$ 17 billion of debt service relief during the IMF programme period (around US$ 2.4bn from Eximbank of China, US$ 2.9 billion from the OCC, US$ 2.5 billion from CDB and US$ 9.5 billion from the bondholders).

Agreement in principle with CDB finalised

Sri Lanka also finalised the agreement in principle with China Development Bank (CDB) on key financial terms of the restructuring of approximately US$ 3.3 billion of debt. This was based on an initial set of terms agreed in May 2024 following several months of good faith engagement. 

“While the terms initially agreed in principle were confirmed to be compatible with Sri Lanka’s IMF-supported programme parameters, further consultations with the OCC over the summer were necessary in relation to the Comparability of Treatment principle,” the government said.

Following the finalisation of this agreement in principle, Sri Lanka expects to receive formal confirmation from IMF staff and the OCC and to be able to move to documentation shortly thereafter.