Sri Lanka exits ‘Restricted Default’ rating and earns ‘CCC+’ from Fitch Ratings

Fitch Ratings has upgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘RD’ (Restricted Default).

The upgrade cites the completion of the international sovereign bond restructuring and an improved outlook for macroeconomic indicators.

Fitch typically does not assign an Outlook to sovereigns with a rating of ‘CCC+’ or below.

The Local-Currency IDR has also been upgraded to ‘CCC+’ from ‘CCC-’, aligning with the Long-Term Foreign-Currency IDR.

This reflects reduced risk of another default on local-currency debt due to the completion of the domestic debt optimisation and improvements in macroeconomic conditions.

Sri Lanka finalised the local-currency portion of its domestic debt optimisation in September 2023, involving the exchange of treasury bills and provisional advances held by the Central Bank of Sri Lanka into new treasury bonds and bills.

The upgrade of the Long-Term Foreign-Currency IDR also reflects the successful restructuring of international sovereign bonds, achieving a 98% participation rate in the invitation to exchange outstanding debt.

Although one bond series with non-aggregated collective action clauses failed to meet the 75% acceptance threshold, the restructuring encompassed 96% of Sri Lanka’s total commercial external debt.

The debt exchange converted 11 international sovereign bonds and accumulated past-due interest (PDI) into a mix of macro-linked bonds, governance-linked bonds, and PDI bonds.

Bondholders were also offered a local alternative governed by domestic law, comprising rupee-denominated bonds and a US dollar bond with step-up coupon payments.