(Bloomberg) -- Sri Lanka said it’s reached an agreement in principle with bondholders to restructure about $12.6 billion in bonds, just two days before the country heads to elections that have rattled investors.
The government and bondholders agreed on terms including a “27% haircut on the nominal amount of existing bonds,” according to a statement released Thursday at the conclusion of a third round of talks. A previous statement in July referred to a 28% haircut.
The latest deal retains a plan to issue notes whose payouts are linked to economic growth, known as macro-linked securities. The revised bond treatment also introduces “governance-linked bond features,” referring to clauses that would cut Sri Lanka’s repayments if it meets certain governance and anti-corruption-related targets.
The island nation had also agreed to restructure debts with a group of local holders of international bonds. In a separate statement, the Finance Ministry said that the accords would provide a combined $3.2 billion debt relief, which could increase to $4.6 billion in case of an economic downturn, or decrease to a minimum of $2 billion if the country’s economy exceeds expectations.
The latest deal bolstered Sri Lanka’s dollar bonds, which have lagged emerging-market peers this year after outperforming in 2023, as investors turned wary over presidential elections scheduled for Sept. 21 and their impact on the nation’s $3 billion International Monetary Fund bailout program. Some of the candidates in Saturday’s vote have said they would seek to renegotiate the IMF loan.
The country’s international bond maturing in March 2029 traded 1.3 cents higher at 53.80 cents to the dollar after the announcement, the highest in a month, according to data compiled by Bloomberg.
“The issue is the implementation after the election,” said Thys Louw, a portfolio manager at Ninety One UK Ltd. “The macro framework under which the deal was agreed can change after this weekend.”
The government said that it still expects a formal IMF acknowledgement that the agreement with bondholders is consistent with its program with the fund, after “having received informal confirmation from IMF staff.” Sri Lanka added that it will continue talks with official creditors, such as France, to ensure that the deal is comparable to a restructuring previously agreed with them.
The country also secured an agreement in principle with commercial lender China Development Bank for around $3.3 billion.
--With assistance from Ronojoy Mazumdar, Andras Gergely and Kerim Karakaya.
(Updates with debt relief provided by the deal in fourth paragraph. A previous version of this story clarified that the total amount of bonds being restructured is about $12.6 billion.)
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