Central Bank makes record straight; says SLDBs left out from restructuring

• Banks were apprehensive whether SLDBs would also be restructured as it could affect their capital positions 
• However, CB assures that domestic credit won’t come under current restructuring efforts by authorities 
• Swap lines with other central banks also excluded from ongoing restructuring efforts 

As Sri Lanka entered into a technical default of its foreign currency borrowings last week, the Central Bank made clear that the Sri Lanka Development Bonds (SLDBs) and other foreign currency debt held by the domestic investors would not be subjected to restructure. 

After the Finance Ministry announced that the country is suspending its foreign currency debt from April 12, it sparked uncertainty among the banks and other market participants whether the debt suspension applies even to the SLDBs, which are held by the domestic investors led by the banks. 

However, Central Bank Governor Dr. Nandalal Weerasinghe diffused such apprehensions during a press conference held at the Finance Ministry last week. 

“The SLDBs are governed by the Sri Lankan law. Those are domestic credit. Therefore, they won’t come under this restructure,” Dr. Weerasinghe said addressing a press conference alongside the Finance Ministry officials to announce the debt suspension. 

The SLDBs became a matter of interest for the banks that hold most of such assets, as a restructure could result in taking haircuts on such bonds, resulting in the erosion of Tier I capital. 

The banks have already been providing against any possible losses from the SLDBs and International Sovereign Bonds (ISBs) since 2020, taking into consideration the sovereign rating downgrades in view of a potential default. 
Sri Lanka, effective from 5:00 p.m. of April 12, decided to suspend the ISBs, bilateral debt and other foreign currency-denominated loans or credit facilities with commercial banks or institutional lenders held by the government or public sector entity. 

Further, all other foreign currency amounts payable by the government or a public sector entity, following a call during the interim period upon guarantee or equivalent financial undertaking issued in respect of the debt of a third party, were also suspended. 

However, the restructure does not apply to the swap lines entered into between central banks and trade lines affecting the imports. 

This is the first time since 1948 independence that Sri Lanka is defaulting on its foreign obligations, as the country maintained an immaculate debt servicing track record thus far.

However, both the Finance Ministry and Dr. Weerasinghe emphasised that Sri Lanka has a deep commitment to honour all its debt obligations and the suspension means only making more room by deferring debt falling immediately, so that it would make available dollars to fund the essential imports. 

However, according to Dr. Weerasinghe, in what is also referred to as a ‘pre-emptive negotiated settlement’ with the foreign creditors, the move by Sri Lanka would tantamount to a soft default, as the creditors are informed in advance of the inability to settle but would work out a mutually agreeable mechanism to settle them in the future. 
Sri Lanka will capitalise the interest on suspended debt from the date of the suspension at a rate not higher than the normal contractual rate applicable to that credit until a restructuring proposal can be presented to the creditors. 
“The holder of an Affected Debt that wishes to receive the Sri Lankan rupee equivalent of an amount falling due during the interim period in lieu of the capitalisation of that amount as described above, should contact the ministry as soon as practicable but not later than one month from the day on which such amounts fell due,” a Finance Ministry announcement stated.