July 13, Colombo (LNW): International Monetary Fund (IMF) is still assessing Sri Lanka’s agreement with creditors regarding the restructuring of its sovereign bonds whilst Barclays, the multinational universal bank based in Britain maintaining “overweight” rating on SL ISBs
The Bank advises investors to consider purchasing those with higher past due interest (PDI) following recent developments in the restructuring of International Sovereign Bonds (ISBs).
The International Monetary Fund (IMF) is currently evaluating Sri Lanka’s agreement with investors regarding the restructuring of its sovereign bonds, according to Julie Kozack, Director of Communications.
Kozack mentioned to reporters in Washington that the IMF team is reviewing the terms of the debt restructuring to determine if they align with the program’s criteria.
Once this evaluation is finished, the IMF will share its perspective. Additionally, the Official Creditor Committee must approve the agreement with private bondholders.
According to Barclays’ latest research in Fixed Income, Credit, Currency, Commodity, Futures and Macroeconomic (FICC), they affirm their positive stance on Sri Lanka bonds, projecting a recovery of approximately 62 at a 12% exit yield, aligning with their fair value estimate ranging from 60 to 65.
They anticipate potential upside from improved exit yield estimates and recommend buying bonds with significant PDI claims such as SRILAN 25/28/29/30.
Referring to their recent reports titled “Sri Lanka: Finish line?, 25 June 2024” and “Sri Lanka: Tick tock, tick tock, 14 Jun 2024,” Barclays highlights key developments indicating progress in the restructuring process throughout late-May and June.
These include governmental recognition of the restructuring’s critical importance for timely disbursements from the IMF, the IMF’s recent disbursement under the Extended Fund Facility (EFF), approval of debt agreements with bilateral creditors, and finalization of a Memorandum of Understanding (MoU) with the OCC.
Barclays anticipates that the restructuring could conclude in the coming months, noting that subsequent steps are likely to be procedural formalities.
Prior to the Joint Working Framework, Barclays’ model assumed a starting coupon of 4%, rising to 8% over the new bonds’ lifespan.
They projected a 10-year maturity extension with principal amortization beginning in 2028 and anticipated principal haircuts of 20-30%, resulting in recovery values around the mid-50s at a 12% exit yield.
The bank’s analysis incorporates features like a consent fee of 1.8% payable upfront during the exchange, an 11% haircut on past-due interest with accrual starting from March 2024, and macro-linked bonds triggered by USD nominal GDP, adjusted by real GDP cumulative growth from 2024 to 2027. Barclays estimates a recovery value of 64.8 under the IMF baseline at a 12% exit yield.
Looking ahead, Barclays estimates the fair value for bonds at 62 with a 12% exit yield, potentially rising to 75 at a 9% exit yield, contingent upon these factors and GDP thresholds for macro-linked bond payouts.
