Restructuring talks with bondholders only bump in the road

• Investors shrug off concerns over no agreement during initial talks by sending equities and bonds higher  

Contrary to the claims that the current economic recovery could get derailed due to the parties coming short in reaching an agreement on restructuring the commercial debt, the evidence showed that the two parties have come a long way in closing the gaps and it is natural there could be bumps in the road toward reaching consensus.
Sri Lanka concluded its first round of restricted discussions with the so-called ad hoc group of bondholders, comprising 50 percent of the total outstanding International Sovereign Bonds but the parties had failed to come to an agreement on the restructuring terms.

The initial proposal made by the bondholders in the middle of March had proposed to link the new bonds to the gross domestic product (GDP) and to have a 20 percent nominal haircut on them. While it further proposed to issue a bond valued at US $ 1,678 million for the Past Due Interest accumulated during the period of default, the coupon rates applicable on the new bonds proposed range from a high of 7.75 percent to 8.25 percent.
The Sri Lankan government meanwhile presented its version of the proposal to restructure the sovereign bonds, which contained only what they called as the plain vanilla bonds, which are linked to nothing, as they contain fixed cash flows, independent of the macroeconomic developments.
While the government had expressed their reservation for the bond holders’ March proposal, the bond holders have rejected Sri Lanka’s proposal.
Meanwhile, the International Monetary Fund (IMF) in its preliminary assessment on each one’s proposals has concluded that while Sri Lanka’s one was consistent with the IMF-supported programme’s debt sustainability targets, the one put forth by the bond holders was not.Despite the developments, the investors in both the equities market and bond markets have broadly shrugged off the noise surrounding the inability of the parties to reach an agreement.
While the equities snapped two days long losses to add 1.78 percent yesterday to settle the All Share Price Index at 11,830.94, the Treasury bills saw the yields falling for the second consecutive week this week.
As a result, the bond holders came up with an updated version of their proposal on April 03, accommodating some of the key observations. But Sri Lanka has continued to make their reservations regarding the structure of what was referred to as the Macro-Linked Bonds or the GDP-linked bonds.
Meanwhile, the bond holders have also suggested the possible introduction of what is called the ‘Governance-Linked Bonds’, for which Sri Lanka has said it would consider subject to being provided with more details of the proposal.A section of the commentators said they remain optimistic of the next stage of the negotiations to further narrow down the areas of differences.They said unlike some who would want to depict this as a setback and a breakdown of the negotiations, they see this as a necessary disagreement towards the final agreement, as negotiation is a process which parties should have a lot of patience until you want to get to where both parties want to go.
“In fact, it is in their interest for the bond holders to make the process smoother and easier for the Sri Lankan government to restructure debt because it was them who hasn’t received their money back in terms of either coupon payments and capital repayments for two years for the money they have lent to Sri Lanka many years ago,” said one economic analyst.