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Sri Lanka is kicking off an exchange to swap $12.6 billion of its bonds for longer-dated notes as it seeks to complete its dollar-denominated debt restructuring.
Investors in the country’s bonds can tender their holdings for new international bonds. The haircut on the nominal amount of existing bonds is 27%, according to a statement released when the two sides reached an agreement in principle. A creditor committee holding about 40% of the bonds said in a separate press release it supports the offer.
Tuesday’s announcement is a milestone in Sri Lanka’s efforts to overhaul its debt after the country defaulted in 2022, as it helps restoring access to international markets. Last week, the Asian nation secured initial approval to receive the next tranche of a $3 billion International Monetary Fund bailout.
“I urge private sector creditors to participate in the debt restructuring process to provide essential relief, thereby laying the groundwork for a bright future for Sri Lanka and its people,” President Anura Kumara Dissanayake said in a separate statement. The restructuring could trim as much as $9.5 billion off Sri Lanka’s debt servicing costs over the length of the IMF program, according to the press release.
Sri Lanka’s dollar bonds gained on Tuesday, extending their sharp advance of recent weeks. They’ve returned nearly 28% so far this year, outperforming the US-currency debt of other emerging economies, Bloomberg indexes show. Still, with the economy reliant on IMF disbursements, the securities are trading between 63 and 66 per dollar, levels typically considered distressed.
The tender offer expires on Dec. 12, with the results announced four days later. Holders with a custodian in Sri Lanka will be offered a separate swap with more favorable terms, according to the statement.
Apart from the issuance of so-called macro-linked bonds, whose payouts are linked to economic growth, the deal includes a governance-linked note, which is a novel instrument for a debt rework. The country could get a 75 basis-point coupon reduction on more than $1.5 billion of debt if it meets certain governance targets, including increasing revenue collection.
“Governance and a lack of fiscal transparency were root causes of the Sri Lankan debt crisis,” said Samy Muaddi, head of emerging-markets fixed income at T. Rowe Price, which is part of the bondholder group. “This innovative security can be a model for other developing countries.”
The security’s structure borrows from another type of ESG debt, known as a sustainability-linked bond. In that case, the goals are environmental, such as reducing emissions of carbon dioxide.
‘Further Tailwind’
The macro-linked bonds are attractive for investors, said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore. The IMF may be inclined to be flexible around its program as the government seeks to unwind some fiscal austerity measures to support private consumption and growth, he added. Robeco owns Sri Lankan debt.
“A further tailwind may also come from an ongoing post-Covid tourism recovery that could see services exports edge back up toward 10% of gross domestic product and bring in much-needed US dollars to rebuild external buffers and fund the island’s development,” McNicholas said.
--With assistance from Anusha Ondaatjie, Matthew Hill, Joanna Ossinger and Ravil Shirodkar.
(Updates with details and investor quote starting in seventh paragraph. A previous version corrected size of bondholder haircut.)
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