Private debt talks between the Sri Lanka government and international bondholders have made further progress over the past two weeks, although more time is required to finalize a restructuring deal, said two sources close to the situation and a person familiar with it.
The bondholder steering committee (steerco)’s restricted period will end today (12 April), and parties are expected to cleanse private information with a public announcement early next week, all three said.
Rothschild, the steerco's financial advisor, and Lazard, the sovereign’s financial advisor, both declined to comment.
A preliminary agreement has not yet been reached, said both sources and the person familiar. It is unlikely that the preliminary deal will be announced next week at the IMF Spring Meetings, added the first source close to the situation.
The two sides have made good progress on a possible deal that features a revised version of the macro-linked bond (MLB) proposal introduced by the bondholder steering committee’s financial advisor Rothschild in October 2023, according to both sources and the person familiar.
However, more time is required to finalize a deal and secure support on the MLB terms from the IMF and Sri Lanka’s official creditors, said the first and the second sources.
The IMF has been working on updating its guidance and doctrine on how to account for state-contingent instruments in its debt sustainability frameworks since last year, as reported by this news service. The Fund has yet to complete its work on this issue, according to the first source.
The MLB structure will also need to pass the comparability of treatment test of Sri Lanka’s official creditors, said the first source and a second source close. Official creditors usually do not favor state-contingent features, as they are technically and operationally more challenging to manage given their loan portfolio, both agreed.
It is possible that bondholders will agree to an MLB structure while official creditors agree to a deal deal without contingent features, as long as the two are deemed comparable, said the second source close.
The MLB structure would provide investors with an all-in-one index-eligible instrument that allows for a predictable increase or decrease in the government’s debt service depending on the country’s economic performance, said the first source. Sri Lanka would be the first sovereign to adopt such a structure, the source added.
The innovative and more complex nature of the MLB proposal requires some more time to get everyone on board, noted the person familiar.
The MLB structure envisages bridging the gap between the IMF and investors on macro projections and reducing the risk of future defaults, while enhancing market liquidity and predictability, although it has faced resistance and reticence from several stakeholders, as reported.
Sri Lanka 2026s and 2029s are down by roughly 0.3 and 1.2 percentage points over the past five trading days, respectively, ending a three-month rally, according to Cbonds. They were seen trading at 60 and 58, respectively, yesterday (11 April), also according to Cbonds.
Talks on restructuring Sri Lanka’s USD 13.4bn Eurobonds made significant progress in the first week of restricted talks in late March, as first reported by this news service.
Some members of Sri Lanka's original bondholder steering committee started negotiating under non-disclosure agreements in the week of 25 March, as anticipated by REDD.
Amundi, BlackRock, Eaton Vance, GMO, HBK Capital Management, Neuberger Berman, T Rowe Price, and Wellington Management were the original members of the steering committee, as reported.
Sri Lanka’s international bond debt stood at 13.4bn at year-end 2022, of which about 13% is held by local banks, as reported by this news service.
The Sri Lankan government is advised by Lazard and Clifford Chance; international bondholders are advised by Rothschild and White & Case; local banks are advised by Newstate Partners and Baker McKenzie, as reported.
by Giovanni Riva