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Friday, June 21, 2024

Sri Lanka Nears Debt Restructuring Deal with Creditors

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Sri Lanka is in advanced negotiations with a consortium of creditors to restructure its debt with bilateral lenders, according to sources familiar with the discussions.

The government, along with members of the official creditor committee, including India, Hungary, and the Paris Club, are currently exchanging draft versions of the agreement, or memorandum of understanding (MoU), the sources revealed on condition of anonymity due to the confidential nature of the talks.

These documents are crucial to finalizing an agreement that was reached in November between Sri Lanka and the official creditor committee. The negotiation process aims to address the remaining issues before reaching a finalized deal, one of the sources disclosed.

Trading data indicates that Sri Lanka’s notes due in November 2025 are trading at 59.6 cents on the dollar, while dollar-denominated bonds due in 2030 are trading around 58.6 cents on the dollar. These prices continue to recover after Sri Lanka failed to secure a deal with bondholders back in April.

The country’s pursuit of agreements with bilateral lenders and bondholders is imperative for receiving disbursements under its $3 billion bailout from the International Monetary Fund (IMF). The IMF will evaluate these deals to ensure they provide sufficient relief for Sri Lanka to meet its debt sustainability criteria.

According to government data, Sri Lanka owes $10.6 billion to bilateral creditors, with China accounting for over 40% of that debt. Additionally, the nation needs to restructure $12 billion in debt with overseas private creditors.

As Sri Lanka holds middle-income status, it is not part of the Group of 20 Common Framework debt initiative. Consequently, negotiations with Chinese official creditors are conducted separately. However, the sources refrained from providing updates on these negotiations due to their separate nature.

Neither Sri Lanka’s central bank governor nor the treasury secretary responded to Bloomberg’s queries. Cabinet approval was sought for a debt restructuring matter, according to Cabinet spokesman Bandula Gunawardana, who declined to provide further details when questioned about bilateral creditor debt agreements.

The Paris Club did not provide an immediate response to a request for comment.

In mid-April, Sri Lanka’s initial talks with dollar bondholders failed to produce an agreement. The government expressed reservations about the structure of “macro-linked bonds,” an instrument proposed by international bondholders.

However, the official creditor committee is not pursuing a structure similar to macro-linked bonds in its debt restructuring discussions with Sri Lanka, according to one of the sources. This suggests that the payout for these securities would not be contingent on the nation’s economic performance. (Bloomberg)

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