Sri Lanka snubs first economy-linked debt restructure offer from bondholders

Sri Lanka
By Editor_1
A general view of city's skyline, amid the country's economic crisis in Colombo, Sri Lanka, April 19, 2022. Sri Lanka's private creditors have sent a proposal on how to restructure $12 billion of overseas debt, including a new type of bond designed to ease repayments in case of future economic pressure - Dinuka Liyanawatte/Reuters/File 

COLOMBO – Sri Lanka has ‘serious reservations’ about the current structure of a GDP linked bonds outlined in the first proposal made by bondholders to restructure debt, though some value recovery instrument can be considered, the Finance Ministry said.

“The authorities have already expressed to the advisors of the bondholders, their serious reservations about the construct of the Macro-Linked Bonds proposed by the Group,” the Finance Ministry said in a statement.

Bondholders are proposing a so-called state contingent bond, with a pay-out linked to the future dollar GDP of Sri Lanka, due to disagreements about the future growth and exchange rate projections in an International Monetary Fund (IMF) agreement which they think is too pessimistic.

“The authorities understand that the Group may have diverging views on the GDP and exchange rate trajectories projected as part of the IMF-supported program,” the statement said, adding that the authorities were therefore ready to discuss a potential value recovery instrument if structured appropriately, taking into account the position of other creditors.

Bondholders have proposed a dollar GDP linked bond with a 20% hair-cut and interest running up to 9.5% to be paid in cash and in kind, but they will fall and further haircuts will be made later if GDP growth is lower than initially expected.

The pay in kind coupons are expected to be consolidated into the principal amount.

Value Recovery Instruments (VRI) issued in past restructurings are ‘upside’  instruments that accrue value if the economy performs better than expected with for example higher oil revenues in an oil producing countries. VRIs are usually also separate from the bond.

The full statement is reproduced below:

The Government of the Democratic Republic of Sri Lanka (“Sri Lanka”) has taken good note of the Ad Hoc Group of Bondholders’ (the “Group”) statement dated October 13 and accompanying debt restructuring proposal relating to Sri Lanka’s outstanding international bonds.

The authorities of Sri Lanka wish to acknowledge the Group’s proposal, and further clarify that this proposal has not received a favourable response from Sri Lanka.

The authorities and their advisors intend to take the necessary time to consider the proposal and assess its compatibility with the parameters in Sri Lanka’s IMF-supported program and the comparability of treatment principle, compliance with both of which is an imperative for the authorities.

The authorities have already expressed to the bondholders’ advisors their serious reservations about the construct of the Macro-Linked Bonds proposed by the Group.

Sri Lanka invites the Group to further engage with the country’s debt advisors, under existing NDAs, to progress the matter in a reasonable and viable way.

It is the authorities’ belief that the indicative debt restructuring scenario shared with commercial creditors in May 2023 provided a robust basis for engagement.

The authorities understand that the Group may have diverging views on the GDP and exchange rate trajectories projected as part of the IMF-supported program.

The authorities are therefore ready to discuss a potential value recovery instrument if structured appropriately, taking into account the position of other creditors.

-economynext.com

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