Hopeful of Sri Lanka ISB restructuring deal despite ‘some setbacks’: IMF Official

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ECONOMYNEXT – There was hope for a deal with Sri Lanka’s sovereign bond holders despite “some setback” Krishna Srinivasan, Director of the Asia and Pacific Department at the International Monetary Fund has said.

Sri Lanka had the first round of direct discussions with sovereign bond holders in London, where a deal was not finalized, but the government agreed to bonds linked to economic performance.

“So my sense is that there are some setbacks on the private sector restructuring, but again, the both parties are talking,” Srinivasan told reporters in Washington.

“So I’m hopeful that there will be some conclusions down the road.”

Bondholders have also proposed a governance linked bond in exchange for defaulted bonds, after asking Sri Lanka.

Future Model

Bondholders are keen on getting an underlying bond linked to economic performance in a new model for defaulted ISBs than a separate warrant (value recovery instrument) used in past restructurings elsewhere, that could serve as a model for future debt workouts.

“We provide, you know, input to the partners who are in the negotiation, both on the macro framework and what’s falling ahead,” Srinivasan said.

A Sri Lanka government statement said an initial IMF analysis showed that a March proposal was not in line with its debt path but a revised proposal in April was not yet assessed.

Investors have broadly proposed a 28 percent haircut for the default-exchange bonds, and an a 1.8 percent upfront fee. The so-called state-continent or economic link will now be “centered on the IMF baseline’ with up or down returns based on whether economy performs better than the past.

Bondholders have proposed an additional standard (plain vanilla bond). Bonds would start to mature from 2029.

Coupons are 4.25 percent on the so-called 4.25 percent bond, but 6.0 percent on the standard bond.

However, interest on the late maturing bond are set to rise steeply after the program ends, which analysts say could also be a sticking point.

Haircuts would steeply reduce from 2028 to as much as 7.3 percent (principles would be clawed back) if GDP is higher than IMF projections and further haircuts and reduced coupons will follow if output (measured in US dollars) falls below the baseline. Coupons would also fall.

However, bondholders are proposing the structure in the conviction that the IMF baseline projection is too low. Sri Lanka has tended to be resilient to various shocks including a civil war.

Sri Lanka country defaulted in 2022 after 10 years of aggressive ‘macro-economic policy’ deployed in the belief that money printing (rate cuts enforced with reserve repo or standing liquidity facilties) can boost growth (target potential output) despite having a reserve collecting central bank.

Currency crises came in rapid succession from 2013 (within an IMF program) 2016, 2018 (within an IMF program) leading to rapid rise in foreign borrowings, amid benign external conditions (US quantitative easing) which flushed US and global markets with dollars.

The US 10-year yield hit 4.69 percent this week, higher than the initial coupon of 4.25 percent proposed for Sri Lanka’s default-exchange bonds based on economic performance.

Foreign debt after reserves grew steeply at the end of each potential targeting output crisis, analysts have shown, with tax cuts also added to the macro-economic policy mix from 2019 December. (Colombo/Apr19/2024)

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[[{“value”:” ECONOMYNEXT – There was hope for a deal with Sri Lanka’s sovereign bond holders despite “some setback” Krishna Srinivasan, Director of the Asia and…

[[{“value”:” ECONOMYNEXT – There was hope for a deal with Sri Lanka’s sovereign bond holders despite “some setback” Krishna Srinivasan, Director of the Asia and…