By: Staff Writer
December 29, Colombo (LNW): S&P Global Ratings has maintained Sri Lanka’s foreign currency sovereign credit rating at selective default (SD) due to the unresolved restructuring of a $175 million SriLankan Airlines bond guaranteed by the government. Meanwhile, newly restructured sovereign bonds have been rated at CCC+, reflecting modest improvements in the country’s financial outlook.
Sovereign Bond Restructuring
Sri Lanka recently completed a significant debt exchange, replacing $12.55 billion of its international sovereign bonds (ISBs) with new instruments to reduce external debt pressure. Bondholders representing 97.8% of ISBs consented to the exchange, facilitating the restructuring process. The restructured debt includes governance-linked bonds, macro-linked bonds, and past-due interest bonds with varying maturity periods and step-up coupon structures.
Through this restructuring, Sri Lanka aims to achieve a $9.5 billion reduction in debt service payments over four years under its IMF-backed Extended Fund Facility. The process has also extended the average bond maturity by over five years while reducing coupon rates by 31%.
Unresolved SriLankan Airlines Bond
Despite these steps, the $175 million SriLankan Airlines bond, which is in default, remains a sticking point. S&P has stated it will revisit Sri Lanka’s long-term foreign currency rating after the bond’s restructuring is complete.
New Bond Ratings and Local Currency Outlook
New sovereign bonds have been rated CCC+, signifying that Sri Lanka’s creditworthiness remains vulnerable but is not in imminent crisis. The local currency rating has also been upgraded to CCC+, with a stable outlook. This reflects progress in debt restructuring balanced against ongoing fiscal and economic risks.
S&P highlighted three categories of new bonds issued post-restructuring:
Governance-Linked Bonds (GLBs): Maturing in 2035, these include performance-based interest adjustments. If specific fiscal targets are met, the coupon rate could decrease by 75 basis points by 2028.
Step-Up Bonds: Maturing in 2038, these offer gradually increasing coupons, starting at 1.0% and rising to 3.5% by maturity. Payments may also be made in local currency under certain conditions.
PDI Bonds: Maturing in 2030, these cover past-due interest and feature a fixed coupon of 4.0%.
Risks and Future Scenarios
S&P’s stable outlook for local currency ratings balances fiscal improvements against risks of inflation, rising interest burdens, and weak fiscal performance. The possibility of further domestic debt restructuring could result in a downgrade. Conversely, stronger-than-expected economic and fiscal improvements could enhance credit ratings.
Completion of the SriLankan Airlines bond restructuring and sustained economic reforms are crucial for a rating upgrade. Post-restructuring ratings are likely to fall in the CCC or low B categories, contingent on the government’s ability to manage its restructured debt effectively.
While Sri Lanka’s recent debt restructuring has alleviated some financial pressure, the unresolved SriLankan Airlines bond and broader fiscal challenges underscore lingering vulnerabilities. The country’s future credit trajectory will depend on its ability to stabilize its economy, achieve fiscal targets, and restore investor confidence.
