IMF Awaits Details on Sri Lanka's ISB Debt Deal

COLOMBO (News 1st); The International Monetary Fund has taken note of the new development with respect to the restricted discussions between the Sri Lankan government and the Ad Hoc group of Bondholders.

Peter Breuer, the senior mission chief for Sri Lanka, said the IMF is currently awaiting additional information and will provide the authorities with an assessment of the agreed terms to ensure consistency with the parameters and debt sustainability objectives under the IMF-supported program.

Sri Lanka and the Bondholders Agreed on Debt Restructuring Terms, revealed a filing with the London Stock Exchange on Wednesday (3) night.

The Sri Lankan government announced restricted discussions took place with the Steering Committee of Bondholders regarding its International Sovereign Bonds (ISBs) from June 21 to July 2, 2024.

The discussions included legal and financial advisors Clifford Chance LLP, Lazard, White & Case, and Rothschild & Co.

The Steering Committee, comprising ten major bondholders representing 50% of the ISBs, held a working session in Paris on June 27-28.

They agreed on core financial terms for restructuring the ISBs, documented in a Joint Working Framework, which includes Governance-linked Bond features.

The framework needs confirmation from Sri Lanka's Official Creditor Committee and IMF staff for consistency with debt sustainability objectives.

According to the Joint Working Framework, a 28% haircut on the nominal amount of existing bonds is proposed.

What Are International Sovereign Bonds?

International Sovereign Bonds serve as a method of accessing funds from international financial markets.

Since attaining middle-income status in 2007, Sri Lanka has utilized this approach to secure loans from the global open market, albeit at elevated interest rates.

Following the default in debt repayments in 2022, Sri Lanka is now confronted with the task of settling $12.5 billion in sovereign bond debt.

The accrued interest on this outstanding debt amounts to nearly $2.9 billion.
 

What Measures Have Been Taken To Service This Debt?

The Hamilton Reserve Bank of the United States initiated legal proceedings against Sri Lanka to recover a sum of $250 million in sovereign bonds.

This action was taken on behalf of multiple institutions that had invested in said sovereign bonds.

Recently, a committee comprising representatives from ten entities that provided loans through sovereign bonds deliberated on strategies for restructuring Sri Lanka's debt.

The discussions involved members of a steering committee representing the bondholders.

Sri Lanka's legal and financial advisors, Clifford Chance LLP and Lazard participated, as did the bondholders' advisors White & Case and Rothschild & Co.

The Second Round of Restricted Discussions took place in Paris, France recently, where the parties engaged in restructuring discussions under strict non-disclosure agreements.

Subsequently, a consensus was reached regarding the restructuring of the sovereign bonds.
 

What Are These Agreements?

This process is intricate in nature; however, it is imperative to simplify it for better understanding.

Currently, there is an accrued interest amounting to nearly US$2.9 billion owed to sovereign bondholders for the outstanding debt period.

Following negotiations, creditors Steering Committee agreed to a haircut of 11% from this total, resulting in a remaining amount of US$ 1,678 million.

It has been decided to issue new sovereign bonds specifically for this adjusted sum, termed as plain vanilla bond, with a maturity period of 4 years and an coupon rate of 4%.

Payments are scheduled to commence from September 30th of this year.

In addition to this, there is a payment of US$ 225 million as a consideration for expressing consent to the restructuring process.

The most complex aspect involves repaying the outstanding debt exceeding $8 billion that is due from 2028 onwards.

The repayment approach, known as the Macro Link Bonds, entails the repayment being contingent on the economic growth progress of Sri Lanka.

Should Sri Lanka achieve a gross domestic product of US$ 88.6 billion by the time the debt is entirely repaid in 2028, there will be a nominal debt haircut of 28%.

Furthermore, if the gross domestic product reaches $100 billion, the debt reduction would stand at 14.96%.

Conversely, a drop in the gross domestic product below US$88.6 billion would allow for a more substantial debt haircut of over 30%.

An additional restructuring proposal involving nearly $2 billion of sovereign bond debt is suggested to be implemented through the governance-linked bonds.

This method aligns the credit cuts and concessions with the efficiency of the governance process, proposing a 0.5% loan reduction.
 

What Happens Next?

Sri Lanka and Bondholders Agreeing on Debt Restructuring Terms, was revealed in a filing with the London Stock Exchange.

Confirmation is needed from Sri Lanka's Official Creditor Committee (OCC) to ensure it aligns with agreed terms.

IMF staff will also review it to ensure consistency with Sri Lanka's IMF-supported program.

After it passed both the OCC and IMF, the International Sovereign Bonds can be subject to restructuring.