Stockbrokers hopeful of Govt. and ISB holders reaching consensus on hair cut

Several stock broking firms have expressed the hope that the Government and holders of SL’s International Sovereign Bonds (ISBs) will reach consensus on the degree of the hair cut.

 “The GoSL proposed an initial haircut of 30% (no grace period, 6-year final maturity in 2029, fixed interest rate of 4%) with SLISB provisions estimated to increase to a total of 52% - 55% as of 31 March 2024 that included a 12% day 1 loss and a 10.5% settlement instrument provision. However, the bondholder group discussion suggested a lower haircut of around 20%, which could change based on GoSL’s economic performance,” recalled Asia Securities. 

It said the GoSL as of now has not agreed with the ISB holders on their proposed Macro Linked Bonds (MLBs), with the Government indicating i) some of the proposal’s “baseline” assessments and ii) a lack of a contingency option in the case of continued economic weakness, as the two main reasons to not agree. 

“We, however, expect the GoSL to agree with a relatively conducive option for both parties, close to the GoSL’s initially proposed 30% haircut and other conditions in line with IMF-proposed DSA targets in the near term,” said Asia Securities.

First Capital in its research note said the March proposal suggested a 20% haircut on the nominal amount of existing bonds (outstanding at December 2023) and the April proposal increased the haircut to 28% (outstanding at December 2023) with no haircuts on Public Due Interests (PDIs) in both March and April proposals. 

In addition to that, a consent fee representing 1.8% of the original principal claim is to be paid upfront except PDIs at $ 225.0 million also suggested in the Steering Committee’s April Proposal. The Steering Committee also suggested the possible introduction of a Governance-Linked Bond, which Sri Lanka said it would consider subject to being provided with more details of this proposal. Such details on the possible structure of a Governance-Linked Bond were subsequently shared with Sri Lanka’s advisors on 3 April 2024.

First Capital Research believes that it is crucial for the Government to strive for consensus in the upcoming weeks. 

“Any delay in discussions and failure to reach an agreement on conditions are likely to delay the IMF’s review and may impact future IMF disbursement,” it opined. 

CT CLSA Securities in its observation said the parties will have to continue with negotiations and this is likely to require more time putting the previously expected June 2024 target for external debt restructuring at risk. 

“This target may still be achievable as discussions are likely to start as soon after the World Bank’s Spring Meetings according to some market sources,” it added. 

CT CLSA was of the view that the local economy is unlikely to be impacted significantly by the delay as sufficient buffers are in place to avert another crisis situation. Gross official reserves including the Chinese swap increased to $ 4.9 billion (3 months import cover) by end March 2024.

“However on the external front the debt restructuring is a requirement for the IMF Board Level approval for the second review. FDIs and other credit lines could be impacted if the restructuring negotiations are delayed significantly,” it added. 

CT CLSA also said the stock market may witness volatility in the near term with sentiment dampening following the news. The market has gained +11% in 2024YTD with the banking shares seeing significant interest. Consumer-facing companies and tourism-focused companies are unlikely to be affected significantly as no hiccups are expected in the local economy. Shares in these segments may see positivity in the upcoming months as well.