StanChart says debt restructuring could involve rupee debt

• But says rupee debt likely not to entail haircuts given its debilitating effects on banks 
• Banks against haircuts on rupee debt in a likely restructuring scenario 
• Weaker banking system coming out of any restructure won’t help SL’s case 
• Multilateral and bilateral debt could be dealt with via coupon cuts and maturity extensions 
• Eurobond holders likely to be affected the most due to expected heavy haircuts 

Standard Chartered Global Research (StanChart) said Sri Lanka’s debt restructuring exercise would likely involve both international and domestic debt, but the treatment in relation to the latter may not entail any haircuts given its debilitating effects on the domestic banking industry. 

The Asia-focused multinational lender said a comprehensive debt restructuring would likely involve coupon reduction and maturity extensions for both rupee bills, bonds and Sri Lanka Development Bonds. On the other hand, in restructuring bilateral and multilateral debt including Central Bank swaps would likely entail only maturity extensions.
Sri Lanka’s Central Bank received a six-month extension till September from The Bangladesh Bank last week to settle the US$ 200 million swap line which it provided in 2021.  

Meanwhile, the eurobonds or the international sovereign bonds held by commercial creditors are likely to be affected the most from the restructuring deal as they could be hit with combined treatment of varying degrees of haircuts, coupon reductions and maturity extensions. 
If this is how each of the debt class is going to be treated when restructuring happens, it could give some relief to the domestic banking sector which has been fretting over for months as to how the rupee debt is going to be dealt with. 

The local banking sector had already appointed their own financial and legal advisors to take up the issue of both the rupee debt and their share of international debt to ensure that their stability would not be affected from any restructuring deal.
While any form of restructuring would entail some level of bruising, a significant damage to the banking sector and making them weaker would not be worth the effort, analysts opine. 
The banking sector has unequivocally expressed that it is against restructuring that involves haircuts.

StanChart said with 40 percent of the local banks’ asset base exposed to the public sector, a principal haircut on local debt would erode their capital base leading to broader implications.
“Hence, we think local debt restructuring will entail converting the current stock of T-bills and T-bonds into longer-maturity T-bonds, and cutting the coupon on T-bonds by 50 percent with no principal haircut. We expect similar treatment for SLDBs”, they added.

Meanwhile, in relation to the multilateral and bilateral debt, StanChart expects them to, “receive a 10-year debt moratorium, as suggested in the Paris Club’s initial proposal, while multilateral debt will be rolled over during the period, with continuing payment of 2% coupon”. 

“Given low interest costs on multilateral debt, a significant maturity extension would deliver substantial NPV gains for the government,” StanChart added.
While China appears to be a key sticking point in reaching consensus on bilateral debt restructuring, StanChart warned of likely holdouts from the camp of commercial creditors given the heavy haircuts involved, potentially delaying the subsequent IMF reviews even after obtaining the Board approval, which it expects to happen in the second quarter.