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Sri Lanka unveils debt restructuring strategy with 20% haircut by end April

Sri Lanka is gearing up to embark on the country’s massive external debt restructuring process following the announcement of debt treatment strategy next month stepping into the most difficult and complex creditor persuasion task ever faced by the island nation, finance ministry sources confirmed.

The finance ministry and the central bank step up talks with commercial creditors in the third week of April ahead of an International Monetary Fund review of a bailout package in six months after receiving the US $330 million first tranche of the $2.9 billion IMF Extended Fund Facility.

The crisis-hit island has secured financing assurances from all its major bilateral creditors, including India and China, and it has paved the way to give its final approval for a $2.9 billion, four-year bailout package on March 20 IMF said on last Tuesday.

The bailout is the culmination of 200 days of intense negotiations as Sri Lanka looks to emerge from its worst economic crisis in more than seven decades.

Holders of Sri Lanka’s international sovereign bonds face a 20 per cent principal haircut in the country’s debt restructuring as well as maturity extensions and a reduction in coupons, according to a Barclays report.

Investors’ focus has shifted to the restructuring of Sri Lanka’s $14.3 billion sovereign dollar bonds after Colombo got final sign off on a $3 billion programme from the International Monetary Fund (IMF) earlier this week, a financial lifeline in its bid to recover from its worst economic crisis in more than seven decades.

Sri Lanka defaulted on its foreign debt in April 2022 as the country plunged into its worst economic crisis, running out of cash to finance even the most essential imports and causing massive social unrest.

Although the total government external debt amounts to US$ 36.73 billion as at end of 2022, only bilateral debt amounting to $10.814 billion is considered at present for the debt restructuring process.

The total International Sovereign Bond ( ISB ) debt stock with arrears as at end of 2022 was $14.286 billion with different maturity periods and varied interest rates, the Ministry’s latest data shows.

It was categorized as commercial debt and most of ISB’s maturity periods will fall on 2024, 2025, 2026, 2027, 2028 and 2029. Each and every ISB has different dates of maturity and varied interest rates.

The only issue at hand is the repayment of $1.25 billion ISB on April 18 this year. The government is servicing other multilateral loans including from the World Bank and ADB amounting to $9.499 billion.

Barclays estimates investors holding the country’s sovereign bonds could see a recovery value – the percentage they recoup on their investment – in the mid-40s while exit yields could range from 12 per cent to 15 per cent.

An inclusion of instruments such as GDP-warrants which link payout to a country’s economic performance in the debt restructuring could potentially improve the recovery value to the mid-50s.

Analysts at investment firm Tellimer put together “three baseline restructuring scenarios” with six-year maturity extension for all of them and nominal haircuts raging 15 per cent to 30 per cent, with higher coupons corresponding to lower haircuts.

Each scenario “results in public debt falling to around 111 per cent of GDP this year and below 95 per cent by 2032,” the firm added, in line with the IMF’s debt to GDP targets.”

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