Sunday Nov 24, 2024
Sunday Nov 24, 2024
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By Ashwin Hemmathagama in New York
As a significant development in the ongoing debt restructuring plan, the US District Court for the Southern District of New York, aligned with the US Government’s policy and considering the progress, granted the plaintiff, the Democratic Socialist Republic of Sri Lanka, an additional five-month stay.
US District Judge Denise Cote, recently signing the Opinion and Order, which will remain in effect until 1 August this year, confirmed Sri Lanka has made significant progress in its debt restructuring effort and anticipates it will continue progressing in its debt negotiations and restructuring over the coming months.
“The further stay of five months is not indefinite and is informed by the timeline on which Sri Lanka is cooperating with the IMF and working toward finalising its restructuring agreements.
As noted in the Stay Opinion, if Hamilton Reserve Bank prevails on its claim in the future, any judgment will be subject to pre-judgment interest. Hamilton’s concern that Sri Lanka will continue seeking stays indefinitely is noted but must be evaluated in the context of Sri Lanka’s significant progress toward restructuring its debt during the prior stay. At this time, the prejudice to the plaintiff of a further stay remains minimal,” held Judge Cote.
According to the Order, as explained in the Stay Opinion, any interest in a judicial economy in this litigation is strongly outweighed by the risk of a ‘rush-to-the-courthouse’ by private creditors holding Sri Lanka’s sovereign debt in an attempt to secure priority. “A judgment for Hamilton would threaten the complex ongoing debt negotiations that are now at an advanced stage, thus endangering Sri Lanka’s ability to reach economic stability. A further stay would serve the interest of persons not parties to this litigation, including Sri Lanka’s official bilateral and private commercial creditors, by promoting comparability of treatment among creditors. Moreover, as explained in the Stay Opinion, a stay is in the public interest and is in line with US policy. The Government advocates for a renewed stay, citing the same aspects of US policy that led it to support the original stay,” he added.
In lieu of a five-month stay, Hamilton Reserve Bank (HRB) proposed a stay of two months until 30 April 2024, on the condition that Sri Lanka provide HRB and the Court with “specific information” about the status of its restructuring. “This proposal is rejected. As an initial matter, Sri Lanka does not anticipate that it will implement restructuring agreements before June or July of 2024. Thus, it is likely that a two-month stay would only lead to yet another motion for a further stay. Furthermore, Sri Lanka has already provided a sufficient description of its restructuring negotiations. Hamilton has elected not to participate in the restructuring discussions, where it could obtain more information, and Sri Lanka has shown that disclosing details of proposals under consideration may jeopardise the negotiations,” confirmed Judge Cote.
The background of Sri Lanka’s foreign debt restructuring negotiations and the history of this litigation runs back to the country’s efforts to emerge from an unprecedented economic, political, and humanitarian crisis. Sri Lanka was sued in the United States by a bondholder after the Government defaulted on its debt for the first time in history while struggling to stop an economic meltdown where HRB, owns over $ 250 million in principal amount of $ 1 billion worth of Sri Lanka’s 5.875% International Sovereign Bonds (ISBs) issued in 2012, filed the lawsuit in June 2022 in a New York federal court seeking full payment of principal and interest. The Bonds matured on 25 July 2022. HRB alleged that due to Sri Lanka’s default, it is owed $ 250.19 million in principle and $ 7.349 million in accrued interest (before accounting for pre-and post-judgement interest). Sri Lanka in mid-April announced a moratorium on foreign debt repayments, including the Bonds and since then has made no payments on the Bonds. The Government of Sri Lanka filed a motion in September 2022 to dismiss on the grounds that the plaintiff lacks contractual standing.
Moving forward, on 20 March 2023, the IMF approved a $ 2.9 billion arrangement under an Extended Fund Facility (EFF) to support Sri Lanka’s economic policies and reforms. The program allowed Sri Lanka to receive funds in phases over a 48-month period, subject to semi-annual review based on Sri Lanka’s continued progress toward IMF targets. Under the EFF, it was a must Sri Lanka commits to a debt restructuring with official bilateral creditors and private commercial creditors. With Sri Lanka reporting significant progress in its debt restructuring efforts while this action has been stayed on 29 November 2023, an agreement was reached in principle with the Official Creditor Committee1 (OCC) on a debt treatment, which is consistent with the EFF program parametres. Sri Lanka has also reached a preliminary debt restructuring agreement with the Export-Import Bank of China on terms consistent with the EFF program targets and comparable to the OCC’s terms of the agreement. In December 2023, the IMF approved the first review of Sri Lanka’s IMF-supported program, where the country’s progress was seen favourably, stating that the Sri Lankan authorities had made commendable progress with putting debt on a path towards stability.
