Colombo, Sri Lanka (LankaBIZ) Nov 27, 2024 – Sri Lanka has initiated an offer for investors to exchange $12.5 billion in dollar bonds for new reduced debts, marking a pivotal step toward resolving the country’s first-ever external default. The proposal, announced on Tuesday, gives investors until December 12 to decide, with many bondholders signaling support for the swap.
The island nation halted dollar debt payments in May 2022 as a severe currency crisis depleted foreign exchange reserves. Progress on debt restructuring stalled due to disagreements among creditors, including China, over restructuring $40 billion in obligations. This offer follows successful sovereign debt restructurings in Zambia and Ghana, underscoring optimism in the global system for addressing such crises.
The restructuring introduces innovative instruments: macro-linked bonds, tying payouts to GDP performance, and governance-linked bonds, reducing payouts in exchange for reforms. President Anura Dissanayake, who assumed office in September, called the deal “an important milestone” as his administration moves to stabilize the economy.
Sri Lanka’s defaulted bond prices have surged by a third this year in anticipation of a deal. The IMF recently approved a $330 million tranche of a $3 billion bailout tied to debt relief, further boosting confidence.
Key creditors, including Amundi, BlackRock, and GMO, representing 40% of the old bonds, backed the deal, citing its potential to enhance debt sustainability. Local holders, controlling over 10% of the debt, are also expected to support the swap, which offers them the option to exchange for rupee-denominated bonds.
The terms of the macro-linked bonds ensure a total debt of $9.1 billion with lower coupons, assuming GDP remains just below $90 billion. However, stronger economic performance could push debt above $10 billion, while weaker GDP may reduce it below $8 billion. Critics caution that these terms might burden Sri Lanka with higher payments if economic growth exceeds expectations.
Sri Lanka’s economy, which grew nearly 5% in Q2 2024, recorded a current account surplus last year for the first time since 1977. The finance ministry emphasized that the terms were carefully negotiated to achieve an optimal outcome for all stakeholders after two years of dialogue with bondholders.
