Moody’s cuts SL’s rating to ‘Ca’ with Stable outlook on default announcement

• Rating agency estimates losses between 35%-65% to creditors based on precedents set by defaulting sovereigns 

Joining the other two global rating agencies, Moody’s Investors Service on Monday cut Sri Lanka’s sovereign rating to Ca, one notch above the lowest in their rating scale from Caa2, after the country announced that it would suspend payments of most of its foreign currency denominated debt
last week.

However, Moody’s left the outlook on the Sri Lankan sovereign Stable to reflect its view that the private sector creditor losses in the eventual debt restructuring will likely be consistent with levels associated with the Ca rating, although with
an upside. 

“On the upside, any agreement with multilateral development partners that unlocks significant external financing may gradually restore foreign investor confidence and crowd in private sector investment,” the rating agency said. 
“Combined with Sri Lanka’s tourism potential, a rapid recovery of foreign exchange inflows may limit the losses to private sector creditors,” it added. 

However, downside risks also remain in the form of extensive delays in fiscal reforms and the inability to secure a large external financing envelop which together might result in even larger losses to the creditors, Moody’s cautioned.  Moody’s estimated losses at between 35 to 65 percent for the creditors drawing from the precedents set by countries, which went into default with a rating at a similar level to Sri Lanka’s which is now at Ca.

While the Sri Lankan government announced a suspension on its selected foreign debt, the government remains committed to settle such debt in full at a future date upon reaching a mutually agreeable debt restructuring plan with the creditors.  To initiate such negotiations, the Central Bank on April 8 called for requests for proposals from financial and legal advisors, which was extended by another week few days ago. 

Meanwhile, Sri Lanka expects to draw down its full quota of SDR it has with the International Monetary Fund (IMF), which comes to about US$ 3-4 billion in a 3-year economic stabilisation programme under an Extended Fund Facility. 

Supplementing that would be the disbursements from other multilateral financiers such as the World Bank, the Asian Development Bank et.al., and potentially more from India which last week assured a further US$ 2.0 billion worth assistance to Sri Lanka on top of its already committed US$ 1.9 billion thus far.