SL wraps-up debt restructuring, setting country for rating upgrade 

• Sri Lanka sees near full consent for bond exchange offer with 98% ready to swap their bonds for new ones
• New bonds to officially be issued on December 20 and likely start trading from month-end
• Final results of the bond exchange set to be published today

Sri Lanka wrapped up its foreign currency debt restructuring last week with the announcement of the near full acceptance of the new bonds in exchange of the existing foreign currency bonds in default for over two years. 

This enables the country to formally come out of its default status, paving the way for potentially multi-notch upgrade in its sovereign credit ratings.

The Finance Ministry last Friday announced that 98 percent of the investors holding Sri Lanka issued International Sovereign Bonds (SLISBs) with a total value of US$ 12.55 billion offered their consent to swap their existing bonds for new bonds that are set to issue on December 20, during the three week window opened on November 25 to tender their existing bonds for new bonds which expired on December 12.

The new bonds may start trading from the end of this month and will bring all forms of debt restructuring to a close. This would help the country to finally look past the painful and dark period of being labeled as a defaulter, to a new era of being accepted by the world again as a country which can do business with trust of its repayments.    

After two years of grueling talks, the two parties, Sri Lanka and its bond holders representing both local and foreign investors, reached an agreement in principle on September 19 shortly before the Presidential elections to exchange bonds for the new ones, most of which are linked to Sri Lanka’s macro-economic performance.

Despite the 98 percent consent for the total value of the bonds in default, a separate report showed that Sri Lanka received only 73 percent acceptance for its bond matured in 2022 in which the US based Hamilton Reserve, an investor holding out of the bond exchange has 25 percent investment.
Hamilton Reserve filed a lawsuit against Sri Lanka after the latter’s announcement of the default in 2022 insisting on full payment but the proceedings were stayed until the exchange was carried out.
Final results of the bond exchange are set to be published today (December 16).

Under the 19 September in-principle agreement, Sri Lanka is expected to receive US$ 9.5 billion worth of debt relief over the four year period with the IMF, 31 percent decline in the coupon rate to 4.4 percent and an extension of the average maturity profile by over 5 years.

The agreement passed the two critical tests of restoring debt sustainability measured according to the IMF and also the principle of comparability of treatment by the official bilateral creditors, enabling its passage thus far to its completion.

Soon after the November announcement for bond exchange, Moody’s placed Sri Lanka sovereign rating which is currently set at Ca on review for upgrade and assigned (P) Caa1 to the new bonds that are going to be issued on December 20 as part of the exchange offer.

The new bonds consist of US$ 1,678 million worth of Past-Due Interest Bond, and four Macro-Linked Bonds and a Plain Vanilla Bond which together has a value of US$ 9,158 million.

The higher the Sri Lanka’s GDP performs from the IMF’s base line, Sri Lanka has to pay a higher coupon rate and also the repayment will also be higher due to the reinstatement of the nominal amount.

Local holders of the SLISBs meanwhile had the option of what is called the ‘Local Option’ which consists of two elements – one, taking the receipt of new US dollar bonds for the 70 percent of the existing bonds they hold with a 10 percent haircut, and second, taking LKR bonds for the balance 30 percent nominal value of the bonds in default with no haircut.

Since the announcement of the in-principle deal for restructuring, the value of the stock prices in the local banks who hold sizable amount of SLISBs have skyrocketed. This is while taking the entire stock market above 14,000 level of the All Share Price Index after recording repeated new highs for the year, expecting higher profits in these banks from likely reversal of provisions they made for potential losses, and also marking an end to one of the biggest hangovers which plagued Sri Lankan economy for three years.