Sri Lanka secures $12.5 Billion international bond restructuring deal

Lotus tower in Colombo, Sri Lanka

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Sri Lanka has reached an agreement to move forward on restructuring approximately $12.5 billion of international bonds, the government stated on Wednesday, according to Reuters.

This is a significant step in the country’s recovery from a severe financial crisis.

In May 2022, Sri Lanka defaulted on its foreign debt for the first time due to a sharp decline in foreign exchange reserves. Restructuring these international bonds was a key condition set by the International Monetary Fund (IMF) under a $2.9 billion bailout program, which has helped Sri Lanka control inflation, stabilize its currency, and improve public finances.

The deal, covering about 50% of Sri Lanka’s bonds, requires confirmation by the Official Creditor Committee (OCC), comprising bilateral creditors and the IMF, to ensure alignment with the IMF’s debt sustainability analysis for the country.

This agreement follows a second round of formal talks with bondholders held this week. “Sri Lanka … looks forward to further constructive interaction to finalize the ISB (International Sovereign Bonds) restructuring,” the government stated.

The restructuring framework includes a 28% reduction on the face value and an 11% reduction on past interest, with interest payments starting in September. It proposes swapping four existing dollar-denominated bonds for a bundle of three fixed-income instruments.

The first instrument is a standard bond with a 4% coupon, maturing in 2028. The second is a series of macro-linked bonds, where payouts and principal will adjust according to the country’s economic performance, decreasing if the economy misses IMF baseline projections and increasing if it exceeds them.

The third instrument is a governance-linked bond, which would reduce payouts if Sri Lanka achieves IMF-demanded reforms and tax revenue targets.

The Paris Club and the IMF did not immediately respond to requests for comment.

On Wednesday, Sri Lankan sovereign dollar bonds slightly increased in price, trading around 57 or 58 cents on the dollar, up nearly 15% year-to-date, according to JPMorgan data.

In late June, Sri Lanka signed an agreement with creditor nations, including Japan, India, and China, to restructure approximately $10 billion in bilateral debt. Now, Sri Lanka needs to present the proposal to all bondholders for final approval.

The country, with a total external debt of $37 billion, also needs to finalize arrangements with the China Development Bank to restructure $2.2 billion in debt, according to the finance ministry.