Lankan bondholders hire legal adviser preparing for sovereign debt restructuring talks

• Ad hoc group includes largest holder of Sri Lankan bonds BlackRock Inc. and Ashmore Group

As Sri Lanka’s economic crisis snowballs, a group of investors in the country’s dollar-denominated international sovereign bonds (ISBs) have reportedly hired the reputed law firm White & Case LLP to obtain legal advice on possible future debt restructuring negotiations, according to a news report by New York-based Wall Street Journal (WSJ).

The move came after President Gotabaya Rajapaksa’s official announcement last week to work with the International Monetary Fund (IMF) to explore a sustainable solution for the country’s external debt servicing problem.

The ad hoc group includes the largest holder of Sri Lankan bonds BlackRock Inc. and Ashmore Group PLC. However, the group is yet to hire a financial adviser, reported WSJ.

BlackRock Inc is the largest holder of Sri Lanka’s outstanding ISBs, among over 9,500 bondholders, accounting for 7.8 percent of the outstanding ISB stock as at the third quarter of last year, while Ashmore Group accounted for 0.4 percent of the outstanding ISBs, according to a report published by Advocata Institute, a Colombo-based think tank. Sri Lanka has US $ 12.55 billion ISB maturities over the next eight years, including US $ 1 billion maturing ISB in July this year. In addition to ISB repayments, the country also owes around US $ 3 billion directly to China as well as to Japan and around US $ 1 billion to India as of last year.

Sri Lanka also has outstanding debt to multilateral creditors such as the World Bank and Asian Development Bank. In total, the country’s public debt to gross domestic product ratio in 2021 hovered just below 120 percent, according to the IMF projections.

Overall, Sri Lanka has US $ 6.9 billion in external debt servicing obligations for this year. However, the country’s foreign currency reserves had fallen to US $ 2.31 billion by end-February.

The IMF recently called the country’s public debts unsustainable, adding that pre-pandemic tax cuts combined with the impact of COVID-19 had put the country’s financial health in jeopardy.

Depleting foreign exchange reserves have resulted in severe shortages of essential goods in the country. Consequently, the Central Bank recently decided to float the exchange rate of the rupee.