Sri Lanka reaches agreement on Sovereign Debt Restructuring
The Government of Sri Lanka has made significant strides in its debt restructuring efforts by reaching agreements in principle with key stakeholders, including the Ad Hoc Group of Bondholders (AHGB), the Local Consortium of Sri Lanka (LCSL), and China Development Bank (CDB), the Finance Ministry announced.
These agreements are part of Sri Lanka’s strategy to restore debt sustainability under its International Monetary Fund (IMF)-supported programme.
Additionally, Sri Lanka has finalised an agreement in principle with China Development Bank on restructuring approximately US $3.3 billion of debt.
Between September 12 and 18, 2024, Sri Lanka engaged in restricted discussions with nine members of the steering committee of the AHGB, with participation from legal and financial advisors such as Clifford Chance LLP, Lazard, and Rothschild & Co.
The AHGB controls roughly 40 per cent of Sri Lanka’s Sovereign bonds. Parallel discussions with the LCSL, which holds around 12 per cent of the bonds, involved advisors from Baker McKenzie and Newstate Partners LLP.
The talks focused on revising Sri Lanka’s debt framework to align with the IMF programme and to ensure comparability of treatment across creditors. A key component of the negotiations was the inclusion of governance-linked bond features. This framework was agreed upon by both the steering committee and the LCSL.
Sri Lanka finalised an agreement with China Development Bank to restructure $3.3 billion of debt. The government has been in discussions with CDB for several months, and the deal is expected to be confirmed by the IMF and Sri Lanka’s Official Creditor Committee (OCC).
Sri Lanka stands to benefit from an upfront debt reduction of approximately $3.2 billion, with the possibility of increasing this figure to $4.6 billion if economic conditions worsen.
Conversely, if the country’s economic performance exceeds expectations, the reduction could drop to $2 billion.
Under the base case scenario, Sri Lanka’s debt service obligations during the IMF programme period will be cut by $9.5 billion. Furthermore, bond maturities will be extended by five years, and interest rates will drop to 4.4 percent, down from an average of 6.4 per cent, the finance ministry clarified.
In the baseline scenario, bondholders will consent to a 40.3 per cent reduction in the present value of their holdings, calculated using an 11 per cent discount rate.
If Sri Lanka’s economy performs exceptionally well, this concession could be reduced to 33 per cent. Coupon adjustments have also been refined compared to earlier terms, offering lower interest rate increases under improved economic conditions.
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