SL private creditors submit proposal for restructuring overseas debt

Private creditors in Sri Lanka have submitted a restructuring proposal for the country’s $12 billion overseas debt, aiming to include a novel bond-type designed to ease repayments in the face of potential economic pressures, Reuters reported on Friday. The proposal, sent on 02 October, outlines a write-down on both capital and interest, the international news agency reported.

The plan suggests the issuance of regular sovereign bonds along with Macro Linked Bonds (MLBs) and these MLBs would automatically reduce coupon payments from 2027 onward if Sri Lanka fails to meet specific economic targets tied to its International Monetary Fund (IMF) programme, it said.

According to Reuters the proposal also includes an option for creditors that combines MLB notes with a regular bond and a second option featuring regular bonds with a Value Recovery Instrument (VRI).

MLBs are introduced to ensure index eligibility, enhancing liquidity. This proposal marks a crucial step for Sri Lanka, representing the first instance of step-down bonds being employed in a debt restructuring, according to Reuters.

The trigger for the step-down payments on the MLBs is linked to indicators such as Sri Lanka’s gross financing needs (GFN) to gross domestic product (GDP) ratio and debt to GDP ratio. If the GFN/GDP ratio exceeds 4.5% in 2027, coupon adjustments will occur, the news agency reported.

The restructuring proposal aligns with parameters from the debt sustainability analysis conducted by the IMF when agreeing to the programme for Sri Lanka’s economy, it reported. A copy of the proposal has been shared with the IMF and the Paris Club Secretariat, Reuters reported quoting an unnamed source. Discussions between bondholders and the government, facilitated by financial and legal advisers, are ongoing, allowing for the continued trading of the country’s securities, the agency said.