International Sovereign Bonds (ISBs)
The restructuring of the ISBs, which represent a substantial portion of Sri Lanka’s external debt, brings immediate relief by reducing the debt stock by around $3.2 billion. If the economy performs worse than expected, this reduction could rise to $4.6 billion, while improved economic performance could reduce it to $2 billion. Bondholders have agreed to a 40.3% reduction in the present value of their bonds, with the average interest rate lowered from 6.4% to 4.4%. Bond maturities have also been extended by five years. These restructuring measures are designed to align with Sri Lanka’s ability to repay its debts as evaluated under the IMF’s Debt Sustainability Analysis (DSA).
A key feature of the ISB restructuring is the differentiation in treatment between local and international bondholders. Local bondholders, organized under the Local Committee of Sovereign Lenders (LCSL), will have the option to exchange their bonds for instruments denominated in both USD and Sri Lankan rupees (LKR). This was done to protect domestic financial markets and minimize losses for local financial institutions. Meanwhile, international bondholders, represented by the Ad Hoc Group of Bondholders (AHGB), have agreed to terms that include state-contingent features, meaning that payments are tied to Sri Lanka’s economic performance.
Bilateral Loans
Alongside the restructuring of ISBs, Sri Lanka has reached agreements with its bilateral creditors, including major lenders such as China, India, and Japan. Under these agreements, the country will defer its loan repayments until 2028 and restructure its debts on concessional terms, with repayment periods extended until 2043. These measures provide Sri Lanka with much-needed fiscal relief and the opportunity to resume development projects that had stalled during the economic crisis, such as highways, light railways, and airport expansions.
Role of Citigroup and Advisors
Citigroup Global Markets Inc. (Citi) has been appointed as the Dealer Manager to oversee the exchange of sovereign bonds. In this capacity, Citi will handle the legal documentation, consent solicitation, and other critical aspects to ensure the smooth execution of the bond restructuring process. Citi’s role is pivotal in the implementation of the agreements reached with bondholders. Additionally, financial advisors Lazard and law firm Clifford Chance were also appointed by the government to facilitate negotiations between the government, bondholders, and bilateral creditors. Together, they are ensuring that the terms of the restructuring align with the conditions set by the IMF.
IMF and the Path Forward
The debt restructuring is in line with the $2.9 billion IMF bailout program that Sri Lanka secured in March 2023. The IMF had made the restructuring of external debt a precondition for further financial support. This agreement with bondholders and bilateral creditors fulfills that requirement, ensuring that Sri Lanka remains on track to receive additional IMF disbursements. The IMF will continue to monitor Sri Lanka’s progress in implementing economic reforms necessary for long-term stability and debt sustainability.
Conclusion
With these critical debt restructuring milestones achieved, Sri Lanka can now focus on stabilizing its economy and regaining investor confidence. The country faces challenges, particularly in addressing public dissatisfaction with fiscal reforms required under the IMF program, such as tax hikes and electricity price increases. Nevertheless, these debt restructuring agreements offer the country a path forward, reducing its debt burden and creating room for economic recovery.
References
- “Sri Lanka Reaches Debt Restructuring Deal With Bilateral Creditors, Including China and India” – The Diplomat.
- “Sri Lanka’s International Sovereign Bonds Restructuring – Frequently Asked Questions” – Daily FT.
- “Cash-strapped Sri Lanka Reaches Crucial Debt-Restructuring Agreement with Bondholders” – Business Today.
- “Sri Lanka Reaches Debt Restructuring Agreement” – Nagaland Post.
- “Citi tapped to oversee Sri Lanka’s sovereign bond exchange” – Daily Mirror.
