By Libby George, Karin Strohecker and Uditha Jayasinghe
Sri Lanka has successfully reached a draft agreement with its creditors to restructure a whopping $12.5 billion of international bonds. This landmark deal comes as a significant boost to the island nation's delicate recovery, just days before its crucial presidential election.
After defaulting on its foreign debt for the first time ever in May 2022, Sri Lanka found itself in the midst of a severe crisis, struggling under a heavy debt burden and depleting foreign exchange reserves.
The agreement follows a series of intense negotiations as Sri Lanka entered its third round of formal debt restructuring talks with bondholders. The country had to revisit certain aspects of a previous draft deal, announced in July, due to objections from the International Monetary Fund (IMF) and official creditors. Approval from both parties is essential for the deal to proceed.
In addition to this breakthrough, Sri Lanka has also finalized a preliminary agreement to restructure $3.3 billion in debt with the China Development Bank, a key player in Beijing's trade policy.
"Sri Lanka is now awaiting formal confirmation from IMF staff that the Agreement in Principle and the Local Option align with the parameters of Sri Lanka's IMF-supported Program," stated the Sri Lankan government.
President Ranil Wickremesinghe has indicated that an IMF visit to Sri Lanka is likely to take place two weeks after the presidential election.
Following the news of the restructuring deal, Sri Lanka's international bond prices saw a significant increase, rallying up to 2 cents by 1004 GMT, reaching a bid range of 53.3-54.5 cents on the dollar, according to Tradeweb data.
However, the tight presidential race on Saturday has raised concerns about the fate of the final agreement, as leading candidates have expressed intentions to revise certain terms of the country's IMF bailout, potentially affecting the restructuring efforts.
What You Need to Know:
The latest draft agreement has revised the GDP thresholds that determine larger payments for bondholders under macro-linked bonds. The previous agreement set these thresholds at a GDP of $92 billion-$100 billion, while the new deal has increased them to $94 billion-$107 billion.
Furthermore, the new agreement has slightly reduced coupon payments. The nominal amount of existing bonds will see a haircut of 27% under the new deal, compared to 28% in the previous agreement.
In a move to accommodate its local investor base holding international bonds, the proposal allows for a swap into a mix of U.S. dollar-denominated bonds and local currency bonds. The government may also pay local holders in Sri Lankan rupees if dollar payments become unfeasible.
Additionally, the new deal includes clauses that give bondholders the choice to change the governing law from New York to Britain or Delaware.
Sri Lanka's leaders have hailed these agreements as monumental steps towards overcoming over two years of debt default and emerging from financial distress.
"With this, Sri Lanka will officially exit the temporary moratorium on servicing foreign debt," said Foreign Minister Ali Sabry. "In other words, as some have put it, out of bankruptcy!"
Representatives from the Paris Club Secretariat, the IMF, and the Local Consortium of Sri Lanka have not yet responded to requests for comments. The Steering Committee of the Ad Hoc Group of Bondholders has declined to comment at this time.