By: Staff Writer
November 30, Colombo (LNW): Moody’s has placed Sri Lanka’s Ca long-term foreign currency rating on review for an upgrade, the credit ratings agency said following the government’s bond-exchange offer that aims to complete the restructuring of international bonds.
The bond swap, launched on Tuesday, is an important part of the island nation’s ongoing $12.55 billion debt restructuring and its efforts to stabilize the economy.
Moody’s gave a provisional Caa1 rating -three notches above the current sovereign rating- to Sri Lanka’s new U.S. dollar-denominated debt issuances, namely macro-linked bonds (MLBs), a governance-linked bond (GLB), and stepup and past-due interest (PDI) bonds.
MLBs have a downside on principal, which put in doubt whether that would prevent agencies from issuing ratings on them -a requirement for them being indexed. The GLB is the first of its kind.
In its assessment of the rating Moody’s said the issuances will rank equally with all other similar government obligations.
Sri Lanka had defaulted on its foreign debt for the first time in May 2022, reeling under a severe crisis amid a heavy debt burden and declining foreign exchange reserves.
MLBs have a downside on principal and the GLB is the first of its kind, which raised doubts about whether agencies would rate the bonds – a requirement for inclusion in indexes.
“Moody’s announcement of rating the MLBs is sensible and should support trading liquidity of the securities post exchange,” said Samy Muaddi, head of emerging markets fixed income at T.Rowe Price, adding that the contingency features of the MLB build on established precedent in global fixed income.
Moody’s said the offerings will rank equally with other similar government obligations.Sri Lanka had defaulted on its foreign debt for the first time in May 2022, reeling under a severe crisis amid a heavy debt burden and declining foreign exchange reserves.
Sri Lankan USD bonds rose on Wednesday, with the June 2025 issue up 0.75 cent at 65.875 cents on the dollar.
The island nation’s restricted default (RD) rating could be removed after debt restructuring is complete, and relations with commercial creditors are normalized.
With the new administration endorsing a deal with sovereign bondholders, political risks have to debt restructure has receded.
Sri Lanka’s sovereign bonds and also a loan from China Development Bank has been classified as commercial debt.“Sri Lanka’s post-default rating would depend upon our assessment of its credit profile,” the rating agency said.
Sri Lanka’s debt to GDP ratio is expected to be high under an IMF projection but so far tax revenues are picking up strongly.
Sri Lanka’s government debt to remain relatively high, even if debt restructuring is completed successfully along the lines laid out in the agreements with its creditors.
The IMF forecasts Sri Lanka’s gross general government debt/GDP ratio to decline only gradually to about 103% of GDP by 2028, from about 116% in 2022, after building in a local- and foreign-currency debt restructuring.
