According to Reuters, which cited two sources with direct knowledge of the situation, Sri Lanka’s private creditors have sent a plan on how to restructure $12 billion in international debt, including a new sort of bond meant to reduce repayments in case of future economic difficulties.
In May 2022, the 22 million-person nation experienced its biggest financial crisis since gaining independence from Britain in 1948 when it tilted into its first foreign debt default due to a severe dollar shortage.
The sources who declined to be identified because the discussions are private noted that the plan submitted on October 2 includes a write-down, or haircut, on both capital and interest.
It calls for the issue of both standard sovereign bonds and so-called Macro Linked Bonds (MLBs), whose coupon payments will be automatically reduced starting in 2027 if Sri Lanka doesn’t fulfil some of the economic goals outlined in the International Monetary Fund (IMF) programme.
An inquiry for comments was not answered by government representatives. An inquiry for comment was not answered by a representative of the creditor committee.
According to one of the sources, the entire proposal gives creditors two options: one combines MLB notes and a standard bond, while the other combines regular bonds and a Value Recovery Instrument (VRI).
According to the sources, the MLBs were added to assure that the new instruments would be eligible for indexing.
An index’s bonds typically have better liquidity.
The suggestion would be a crucial step for Sri Lanka, which is required to offer guarantees of debt restructuring from bondholders and important bilateral lenders including China, Japan, and India under the terms of a $2.9 billion IMF bailout secured in March.
According to the sources, it would be the first time that step-down bonds of this kind have been utilised in a debt restructuring.
According to one of the sources, measures including Sri Lanka’s debt to GDP ratio and gross financing needs to GDP ratio would be used to determine when step-down payments on the MLBs would begin.
