Sri Lanka has initiated a debt exchange to restructure $12.6 billion of its bonds by offering longer-dated notes, marking a significant step in its recovery from a 2022 default. The program involves swapping existing bonds for new international bonds with a 27% haircut on their nominal value, as outlined in a prior agreement between the government and creditors.
A creditor committee representing about 40% of the bondholders has expressed support for the offer, signaling a strong backing for the initiative.
A Key Milestone in Debt Restructuring
Tuesday’s announcement represents a milestone in Sri Lanka’s efforts to rebuild its financial standing and regain access to international markets. The move follows the country’s initial approval to receive the next tranche of a $3 billion bailout from the International Monetary Fund (IMF).
President Anura Kumara Dissanayake urged private creditors to participate, emphasizing the importance of the restructuring for the nation’s recovery. “This process provides essential relief, laying the groundwork for a bright future for Sri Lanka and its people,” he stated.
The restructuring plan could potentially reduce Sri Lanka’s debt servicing costs by as much as $9.5 billion over the duration of the IMF program.
Bond Performance and Investor Sentiment
Sri Lanka’s dollar-denominated bonds have seen significant gains, extending a rally that reflects investor optimism. The bonds have returned nearly 28% year-to-date, outperforming other emerging markets’ US-currency debt, according to Bloomberg indexes. Despite this, the securities are still trading between 63 and 66 cents on the dollar, levels typically considered distressed.
The tender offer for the bond swap will close on December 12, with results expected four days later. Bondholders with custodians in Sri Lanka will be offered a separate swap option with more favorable terms.
Innovative Bond Features: Macro-Linked and Governance-Linked Notes
The restructuring plan introduces macro-linked bonds, which tie payouts to economic growth, and a governance-linked note that incentivizes improved fiscal transparency. Sri Lanka could benefit from a 75 basis-point coupon reduction on $1.5 billion of debt if it meets governance targets, such as enhancing revenue collection.
“Governance and fiscal transparency were root causes of the Sri Lankan debt crisis,” said Samy Muaddi, head of emerging-markets fixed income at T. Rowe Price. “This innovative security can be a model for other developing countries.”
The governance-linked note takes inspiration from sustainability-linked bonds, which are tied to environmental goals like carbon emissions reductions.
Economic Outlook and Investor Optimism
Philip McNicholas, Asia sovereign strategist at Robeco Group, noted the attractiveness of macro-linked bonds for investors, particularly given the IMF’s potential flexibility in supporting private consumption and growth.
“A further tailwind may also come from an ongoing post-Covid tourism recovery that could see services exports approach 10% of GDP, bringing in much-needed US dollars to rebuild external buffers and fund development,” McNicholas said.
The success of Sri Lanka’s bond swap and debt restructuring efforts will be critical in stabilizing its economy and paving the way for sustainable growth.
