Sri Lanka’s bondholders have officially approved the government’s proposal to restructure $12.55 billion of international bonds, marking a significant milestone in the country’s ongoing debt recovery efforts.
Final results revealed that 97.86% of bondholders, representing the outstanding principal, voted in favor of the plan. This decision paves the way for swapping defaulted bonds with innovative fixed-income instruments, tailored to link payouts to economic growth and governance targets.
The debt restructuring follows Sri Lanka’s first-ever foreign debt default in May 2022, caused by a high debt burden and dwindling foreign exchange reserves. This agreement positions Sri Lanka as the fourth country to finalize a bond restructuring in 2023, after Ghana, Ukraine, and Zambia.
Key Features of the New Bonds
The restructured debt introduces a mix of instruments, including: Governance-Linked Bonds (GLBs): A first-of-its-kind instrument designed to reward Sri Lanka for improving governance.
The GLB offers a 75-basis-point reduction in interest payments if the country meets two key IMF-linked targets by 2026 and 2027:
These targets are exceeding revenue-to-GDP ratios projected at 15.3% and 15.4%, Publishing a Fiscal Strategy Statement on the Finance Ministry’s website.
Meeting these targets would reduce Sri Lanka’s interest payments by $80 million over the bond’s lifetime, maturing in 2035.
GDP-Linked Bonds: These instruments are tied to Sri Lanka’s economic performance and introduce adjustments in payouts. If the economy surpasses growth projections, both interest and capital payments could increase in 2028.
Conversely, if growth underperforms, bondholders would face a reduction in principal, providing up to $2.1 billion in additional debt relief, according to Rothschild advisors.
The GDP-linked bonds use IMF baseline data and incorporate a control variable for cumulative real GDP growth (2024-2027). This ensures Sri Lanka’s debt servicing aligns with genuine economic performance rather than currency fluctuations.
Implementation and Challenges
The new bonds will be issued on December 20, with the necessary minimum thresholds already met. Residual bonds from 2022, which received 73% acceptance, will continue to trade. Sri Lanka plans to issue $10.4 billion in GDP-linked bonds, including $1.6 billion in GLBs and 155 billion Sri Lankan rupees worth of domestic bonds.
Observers highlight the complexity of Sri Lanka’s restructuring instruments, which combine incentives for governance improvements and economic stability.
While countries like Argentina and Greece have previously used performance-linked bonds, Sri Lanka’s instruments stand out by including downside protection, which shields the economy during economic shortfalls.
However, challenges remain. For these bonds to gain traction among global investors, they must secure ratings from major agencies like Moody’s, Fitch, and S&P and be included in key indexes, such as those managed by JPMorgan. Moody’s has already approved the structures, and the other agencies are expected to follow suit.
Sri Lanka’s debt restructuring introduces groundbreaking financial instruments aimed at stabilizing its economy and ensuring transparency in governance.
While the bonds offer innovative solutions, their success depends on investor confidence, liquidity, and ease of valuation.
This restructuring serves as a critical step toward economic recovery while also acting as a testing ground for experimental instruments that could influence future global debt restructuring strategies.
