Sri Lanka has successfully negotiated a crucial agreement to restructure approximately $12.5 billion in international bonds, marking a significant milestone in the nation’s ongoing efforts to recover from a severe financial crisis.
The South Asian island defaulted on its foreign debt for the first time in May 2022, precipitated by a dramatic decline in foreign exchange reserves. This restructuring agreement is a pivotal condition set by the International Monetary Fund (IMF) as part of its $2.9 billion bailout program, which has been instrumental in helping Sri Lanka control inflation, stabilize its currency, and improve public finances.
The agreement involves selected bondholders who account for about 50% of Sri Lanka’s bonds. The deal’s approval is contingent upon confirmation by the Official Creditor Committee (OCC), comprising bilateral creditors and the IMF, ensuring alignment with the IMF’s debt sustainability analysis for Sri Lanka.
Following a second round of formal negotiations with bondholders this week, Sri Lanka expressed optimism about finalizing the restructuring process. “Sri Lanka… looks forward to further constructive interaction to finalise the ISB (International Sovereign Bonds) restructuring,” stated the government in a regulatory announcement.
The restructuring framework includes a 28% reduction on the face value of the bonds and an 11% cut on past interest, with interest payments slated to begin in September. The plan proposes swapping four existing dollar-denominated bonds for a new package of three fixed income instruments:
- A standard bond with a 4% coupon maturing in 2028.
- A series of macro-linked bonds with payouts adjusted according to the country’s economic performance.
- A governance-linked bond, where payouts are reduced if Sri Lanka meets IMF-demanded reforms and tax revenue targets.
While the bondholder group, the Paris Club, and the IMF have not immediately commented, Sri Lankan sovereign dollar bonds showed marginal price increases, trading around 57 to 58 cents on the dollar.
In June, Sri Lanka signed an agreement with creditor nations, including Japan, India, and China, to restructure about $10 billion in bilateral debt. The country must now present the restructuring proposal to all bondholders for final approval and finalize arrangements with China Development Bank to restructure an additional $2.2 billion in debt.
This agreement represents a critical step towards restoring financial stability in Sri Lanka, whose total external debt amounts to $37 billion, according to the latest data from the finance ministry.
