Sri Lanka rejects bondholders’ proposal

Sri Lanka (Commonwealth) _Rejecting the request of foreign bondholders to restructure over $12 billion in debt, Sri Lanka on Tuesday delayed its efforts to end a two-year financial crisis and jeopardized vital help from the International Monetary Fund.

The administration stated in a statement that the two primary reasons the deal was not reached were some of the “baseline” evaluations included in the proposal and the absence of a backup plan in the event that the economy continued to weaken.

While Colombo expressed optimism for more negotiations “as soon as feasible,” there was a real possibility that if a resolution was not reached in the upcoming weeks, the next tranche of crucial IMF assistance funds may be postponed.

Although Sri Lanka has previously reached a settlement with its principal creditors, in order to get the approval of the IMF Board for the next $337 million installment of its $2.9 billion program, a “agreement in principle” with creditors was also required. One of the primary obstacles, according to the government, was that the bondholders’ plan’s “baseline parameters” did not align with those included in the IMF program.

It further stated that the “steering committee” of bondholders, with whom it had been negotiating in recent weeks, had shown no desire to continue “restricted discussions,” which are an important aspect of debt negotiations that take place in secret and behind closed doors.

Given these restrictions also hinder their capacity to engage in the market, it would be rare for major money managers to stay limited for an extended period of time after an initial extension. With several parties interested in Washington for the IMF/World Bank meetings, talks might resume as early as later on Tuesday, according to a person familiar with the process.

The source stated that the discussions have been exacerbated, as they have been in previous recent debt negotiations, by an information imbalance between the parties, particularly bondholders’ lack of visibility into the parameters agreed upon with China and the Paris Club.

Additionally, “macro-linked bonds,” or MLB for short, were to be used to tie creditors’ future repayments to the macroeconomic expansion of the nation. This idea was rejected by Sri Lanka. It stated that it was seeking an additional safeguard in the event that Sri Lanka’s economy failed to meet IMF growth forecasts, as well as a “test” to initiate both downward and upward changes in the MLB.

Sri Lanka’s bonds fell by around 2.5 cents due to disappointment that a deal had not yet been reached; as a result, they now trade at between 54 and 55.4 cents on the dollar, little over half of their initial face value.

It will now be challenging to finish the IMF evaluation by June since further discussions are required, according to Udeeshan Jonas, chief strategist of the CAL Group stock research company.

When Sri Lanka’s foreign exchange reserves declined at the beginning of 2022, it was unable to pay for necessities like fuel, cooking gas, and medication, and it entered its worst financial crisis since gaining independence from the British in 1948.

After going into default on its international debt in May 2022, the island country began talks with its bilateral creditors some months later. In November of last year, it was able to secure a deal in principle with China, India, and the Paris Club. To finish the IMF review procedure, Sri Lanka also requires agreements with all of the bilateral creditors, including the Export-Import Bank of China.

With the assistance of the IMF program, Sri Lanka’s once-soaring inflation rate decreased to 0.9% in March, and the country’s currency has strengthened by 7.6% so far this year. After decreasing 2.3% in 2023, the economy is predicted to start growing again in 2024. It is one of numerous less developed nations that have struggled to overcome their current financial crises.

The IMF’s indication that the agreement Ghana was expecting to reach with bondholders would not be sufficient to make its debt levels sustainable again caused the country’s $13 billion restructuring discussions to collapse.

Sri Lanka’s setback, according to Viktor Szabo, a developing-market debt portfolio manager at Abrdn in London, is probably merely a delay and not a deal-breaker. Szabo declared, “It is heading in the right direction.” “But it is just somewhat slower than expected.”

The country’s debt restructuring arrangement with official creditors was recently applauded by a group of creditors holding Sri Lanka’s international bonds, while they regretted the lack of openness around the transactions that had been made thus far.

The case highlights growing concerns that attempts by insolvent governments to finalize restructuring may be hampered or delayed by private creditors’ lack of visibility into debt agreements with their official creditors.