Friday Sep 20, 2024
Friday Sep 20, 2024
Friday, 20 September 2024 00:00 - - {{hitsCtrl.values.hits}}
President Ranil Wickremesinghe
Treasury Secretary
Mahinda Siriwardana
The Government yesterday announced the near completion of Sri Lanka’s sovereign debt restructuring exercise, as agreed under Sri Lanka’s IMF-supported program to restore debt sustainability.
The breakthrough follows the Government reaching an agreement with International Sovereign Bond (ISB) holders (the Group) accounting for 40% of the aggregate outstanding amount of the bonds and Local Consortium of Sri Lanka (LCSL), controlling approximately 12% of the aggregate outstanding amount of the bonds as well as finalising agreement in principle with China Development Bank (CDB) on the key financial terms of the restructuring of approximately $ 3.3 billion of debt.
The agreements in principle with the Group, the LCSL and CDB, which were approved by the Cabinet of Ministers yesterday and the Finance Ministry said the developments “almost completes Sri Lanka’s sovereign debt restructuring exercise, as agreed under Sri Lanka’s IMF-supported Program to restore debt sustainability”.
Under these agreements, the Finance Ministry said it is expected that Sri Lanka will benefit from an upfront debt stock reduction of approximately $ 3.2 billion, which could increase up to a maximum of $ 4.6 billion in case of an economic downturn or decrease down to a minimum of $ 2.0 billion if Sri Lanka’s economic performance exceeds expectations by a significant margin.
In addition, under the baseline debt treatment scenario, the Government’s debt service payments over the IMF program period will be reduced by approximately $ 9.5 billion, the average maturity of the bonds extended by over five years and interest rate reduced from 6.4% to 4.4% on average.
Under the agreements, holders of the bonds will be consenting to a present value concession of 40.3% in the baseline scenario, calculated with a discount factor of 11%. In respect of the highest state (resulting from the most significant economic outperformance), bondholders’ present value concession relative to the JWF has increased from 27% to 33%.
Compared to discussion in July, coupon adjustments for the highest state were reduced by roughly 160 basis points. Similarly, the coupon adjustments for the second highest state were reduced by roughly 60 basis points, the Finance Ministry added.
Overall, thanks to the agreements already achieved with Eximbank of China and members of Sri Lanka’s Official Creditor Committee (“OCC”) as well as CDB and bondholders, Sri Lanka will have obtained over $ 17 billion of debt service relief during the IMF program period (around $ 2.4 billion from Eximbank of China, $ 2.9 billion from the OCC, $ 2.5 billion from CDB and $ 9.5 billion from the bondholders).
Separately the President’s Media Division said Sri Lanka has reached agreements with external commercial creditors to restructure approximately $ 17.5 billion of external debt, achieving a 40.3% Net Present Value (NPV) concession. This provides significant debt relief and reduces interest payments, strengthening the country’s financial stability. Sri Lanka’s external debt under treatment amounts to $ 23 billion. Market value for tradable debt instruments, amounted to $ 33.1 billion in 2023 and in terms of face value, it was $ 38.4 billion.
Pending a formal announcement, President Ranil Wickremesinghe on Wednesday addressing a rally in Matara declared that Sri Lanka will exit bankruptcy yesterday. He said a crucial discussion between the Government and International Sovereign Bondholders would take place after which Sri Lanka is expected to receive international support once the country’s bankruptcy is fully resolved.
The full statement of the Finance Ministry issued yesterday is as follows.
The Government of the Democratic Socialist Republic of Sri Lanka (“Sri Lanka”) announced yesterday that it has held restricted discussions between 12 to 18 September 2024 (the “Restricted Period”) with nine members of the steering committee (the “Steering Committee”) of the Ad Hoc Group of Bondholders (the “Group”) who agreed to take part in such restricted discussions (the “Restricted Members of the Steering Committee”). Sri Lanka was joined by its legal and financial advisors, Clifford Chance LLP and Lazard, respectively, and the Restricted Members of the Steering Committee were joined by the Group’s legal and financial advisors, White & Case LLP and Rothschild & Co, respectively. The Steering Committee, as a whole, comprises ten of the largest members of the Group, with the Group controlling approximately 40% of the aggregate outstanding amount of the bonds.
Sri Lanka also announced yesterday that in the last year, it has held restricted discussions with members of the Local Consortium of Sri Lanka (“LCSL”), joined by its legal and financial advisors, Baker McKenzie and Newstate Partners LLP, respectively. The LCSL comprises 11 members, controlling approximately 12% of the aggregate outstanding amount of the bonds.
During the discussions with the Restricted Members of the Steering Committee, the parties discussed the conclusions of the consultations carried out throughout the summer between Sri Lanka, its advisors, the Group’s advisors, the International Monetary Fund (the “IMF”) and Sri Lanka’s Official Creditor Committee (the “OCC”), in respect of the joint working framework on a debt treatment agreed between Sri Lanka and the Restricted Members of the Steering Committee, on behalf of the Group, in June 2024 (as announced on 3 July 2024) (the JWF).
During these consultations, IMF staff determined that the JWF was not consistent with the parameters of Sri Lanka’s IMF-supported Program and the OCC expressed concerns regarding the consistency of the JWF with the comparability of treatment principle (“Comparability of Treatment”). It became clear, during these consultations, that further work was necessary to arrive at an agreement in principle between the parties which would receive a favourable assessment from both IMF staff and the OCC.
Following an iterative process with IMF staff at technical level and taking account of the feedback received from the OCC regarding the terms of the JWF, Sri Lanka and its advisors designed a revised debt treatment. The revised debt treatment was based on the JWF, with amendments designed to ensure compliance with the parameters of Sri Lanka’s IMF-supported program and the Comparability of Treatment principle, while preserving the Group’s and Sri Lanka’s interests to the fullest possible extent.
The revised debt treatment was presented to and discussed with the Restricted Members of the Steering Committee, in conjunction with the terms of an alternative restructuring option (the “Local Option”), which was concurrently presented and discussed with the LCSL. The Local Option was developed in response to a request by the LCSL over a number of months in which Sri Lanka, its advisors, the LCSL and its advisors exchanged alternative proposals.
At the conclusion of the Restricted Period, Sri Lanka is pleased to report that it has reached an agreement in principle with the Restricted Members of the Steering Committee, on behalf of the Group, on the terms of a comprehensive restructuring of the Bonds (the “Agreement in Principle”), the key financial terms of which are included in the Annex to this announcement.
During the discussions with the Restricted Members of the Steering Committee during the Restricted Period, the parties thereto also discussed and agreed the inclusion of governance-linked bond features in the terms of the plain vanilla bond instrument that forms part of the revised debt treatment.
At the same time, Sri Lanka is also pleased to report that it has reached an agreement in principle with the LCSL on the key financial terms of the Local Option, the key financial terms of which are also included in the Annex to this announcement. It has further been agreed that the Local Option would be offered to all holders of the bonds, subject to a cap tentatively set at 25% of the aggregate outstanding amount of the bonds, with priority given to local holders of the bonds, and pro-rata allocation of the balance between consenting international holders of the bonds who have opted for the Local Option.
During the Restricted Period, Sri Lanka also progressed discussions and reached an agreement in principle with the Restricted Members of the Steering Committee on certain non-financial provisions relating to the restructuring of the bonds, including a loss reinstatement provision, a most favoured creditor clause and certain ongoing information disclosure requirements. A mechanism to change the governing law of the New York law governed new securities to English or Delaware law with the consent of a supermajority of bondholders if proposed by holders of 20% of any particular series of the new securities was also agreed. In addition, Sri Lanka agreed with the Restricted Members of the Steering Committee and the LCSL on matters relating to the reimbursement of certain expenses of the Steering Committee and the LCSL.
In respect of the Local Option, Sri Lanka and the LCSL have agreed the USD Bond shall include a provision whereby Sri Lanka would have the option, at its sole discretion, to make debt service payments in LKR rather than USD, at the then prevailing exchange rate , if Sri Lanka is, in its determination, unable to make such debt service payments in USD on the contractual payment dates.
Sri Lanka has agreed with the Restricted Members of the Steering Committee, on behalf of the Group, and the LCSL to proceed with the implementation of the restructuring of the bonds on the basis of the Agreement in Principle and the Local Option.
Having received informal confirmation from IMF staff during the Restricted Period, Sri Lanka now expects to receive formal confirmation from IMF staff that the Agreement in Principle and the Local Option, taken together, are fully consistent with the parameters of Sri Lanka’s IMF-supported program. In parallel, Sri Lanka will continue to work with the OCC and its Secretariat to secure confirmation of compliance of the Agreement in Principle and the Local Option with the Comparability of Treatment principle. Upon receiving such confirmations, Sri Lanka commits to use its best efforts to expedite the implementation of the restructuring in respect of the bonds.
Finally, Sri Lanka is pleased to report having finalised agreement in principle with China Development Bank (CDB) on the key financial terms of the restructuring of approximately $ 3.3 billion of debt, based on an initial set of terms agreed in May 2024 following several months of good faith engagement. While the terms initially agreed in principle were confirmed to be compatible with Sri Lanka’s IMF-supported program parameters, further consultations with the OCC over the summer were necessary in relation to the Comparability of Treatment principle. Following the finalisation of this agreement in principle, Sri Lanka expects to receive formal confirmation from IMF staff and the OCC and to be able to move to documentation shortly thereafter.
The agreements in principle with the Group, the LCSL and CDB, which were approved by the Cabinet of Ministers of Sri Lanka earlier today, almost completes Sri Lanka’s sovereign debt restructuring exercise, as agreed under Sri Lanka’s IMF-supported program to restore debt sustainability.
Sri Lanka would like to thank the Group and its advisors, the LCSL and its advisors, and CDB and its advisors, for their close collaboration and continuous support throughout the negotiations.
