Lanka gets restructuring proposal from bond holders

ECONOMYNEXT –Sri Lanka has received a proposal from private bondholders and is assessing it, a senior government source said as efforts are underway to also restructure official debt.

Bondholders have proposed ‘macro linked bonds’ where the coupon will adjust downwards if Sri Lanka’s growth is lower than forecasted, as well as regular bonds, Reuters, a news agency reported.The proposal includes hair-cuts and coupon reductions, the report said.

Unlike bilateral creditors who do not usually take hair-cut from middle income countries but give grace periods and extend maturities along with coupon cuts, private creditors usually write down the principle in return for faster payback.

Some of Sri Lanka’s bond holders consider the International Monetary Fund’s growth projections for the medium term at 3.1 percent to be pessimistic.Sri Lanka itself has forecasted 5.0 percent GDP growth for 2027 compared to 3.1 percent in an IMF debt sustainability assessment.A lower growth number squeezes the gross financing need, defined as a share of the GDP between 2027-2032, forcing bondholders to take steeper haircut than if the

Defining the GDP in dollar terms to link the bond was also considered, according to a source with knowledge of the matter.It was up to Sri Lanka authorities and bondholders “to find some kind of instrument that works for both parties,” IMF mission Chief Peter Breuer said in March responding to whether the IMF would endorse such securities.If issued such bonds would be a first to private bondholders in a sovereign restructure.

Previous so-called state contingent bonds involved value recovery instruments which traded separately and were not included in bond indices and were bought by hedge funds.

A bond with a coupon which is adjusted based on GDP however would be index eligible and could be held by ‘real money’ funds who own a bulk of Sri Lanka bonds.

Sri Lanka has issued 12.55 billion US dollars of sovereign bonds of which one bond is under litigation.China has agreed to restructure 4.2 billion US dollars of its debt but details have to be worked out, Sri Lanka’s finance ministry said this week.