Sri Lanka Secures $12.5 Billion Bond Restructuring Agreement Ahead of Elections, Reports Reuters

By Libby George, Karin Strohecker, and Uditha Jayasinghe

LONDON – Sri Lanka has reached a draft agreement with creditors to restructure $12.5 billion of international bonds, a significant development that bolsters the island nation’s fragile recovery just two days ahead of its presidential election.

The country experienced its first-ever default on foreign debt in May 2022, amid a severe crisis marked by an overwhelming debt burden and shrinking foreign exchange reserves.

This agreement follows the initiation of a third round of formal debt restructuring talks with bondholders last week. Sri Lanka was required to renegotiate certain aspects of a previous draft deal revealed in July, due to objections from the International Monetary Fund (IMF) and official creditors. Obtaining their approvals is essential for moving forward with the deal.

Additionally, a preliminary agreement has been finalized to restructure $3.3 billion in debt with China Development Bank, one of China’s leading trade policy banks.

"Sri Lanka now expects to receive formal confirmation from IMF staff that the Agreement in Principle and the Local Option, taken together, align fully with the parameters of Sri Lanka’s IMF-supported Program," the Sri Lankan government stated.

The government added that it will collaborate with the Official Creditor Committee (OCC) to ensure the compliance of the Agreement in Principle and the Local Option with the principle of equitable treatment.

Once the formal approvals from both parties are secured, the Sri Lankan government has pledged to expedite the implementation of the bond restructuring.

President Ranil Wickremesinghe indicated that an IMF delegation is likely to visit Sri Lanka two weeks following the election.

As a result of the news, the prices of Sri Lanka’s international bonds rose by as much as 2 cents, trading between 53.3 and 54.5 cents on the dollar.

However, the tight race in the upcoming presidential election raises uncertainties regarding the final deal, as the leading candidates have expressed intentions to amend certain terms of the country’s IMF bailout, which could influence restructuring efforts.

Revised Terms

The latest draft agreement introduced higher GDP thresholds for bondholders to receive increased payments on macro-linked bonds. Previously, payments were triggered at a GDP of $92 billion to $100 billion, while the new terms set the thresholds at $94 billion to $107 billion.

The agreement also included reductions in some coupon payments, while the haircut on the nominal amount of existing bonds was adjusted from 28% in the July agreement to 27% now.

To accommodate local investors holding international bonds, the proposal provides an option to convert into a combination of U.S. dollar-denominated bonds and local currency bonds, with provisions allowing payments to local holders in Sri Lankan rupees if dollar payments cannot be fulfilled.

Furthermore, the new deal encompasses various clauses offering bondholders the choice to change the governing law from New York to either England or Delaware.

Legislators in New York, whose laws govern a significant portion of international emerging market debt issuance, are contemplating a controversial bill that could lead to substantial changes in debt restructuring and bondholder rights.

Sri Lanka’s leadership hailed these agreements as crucial milestones in the nation’s efforts to recover from over two years of debt default. The finance ministry indicated that the proposed deal would reduce bond debt service payments during the IMF program by $9.5 billion.

"With this, Sri Lanka will be officially out of the temporary moratorium on servicing foreign debt," declared Foreign Minister Ali Sabry in a post on social media. "In other words, as some have referred to it, we will be out of bankruptcy!"

Spokespersons from the Paris Club Secretariat and the IMF did not immediately respond to requests for comment, and the Steering Committee of the Ad Hoc Group of Bondholders declined to provide a statement.