SL sees light at the end of tunnel says SCB

• Standard Chartered Bank in its latest global research welcomes Lankan authorities finally reaching agreement with key bondholders on core financial terms of ISB restructuring
• Says SL Govt. awaits support from OCC and IMF; process to be expedited once confirmation received
• SCB sees probability-adjusted recovery value of 64 at 11% exit yield; remains ‘Market weight’ on Sri Lanka
• Expects gradual and modest LKR depreciation versus the USD, and projects USD-LKR at 390 as of end-2027; projects 2024 GDP in $ 89-91 b range and nominal GDP above $ 96 b as of end-2027
• Estimates real cumulative GDP growth from 2024-27 at 3% in 2024 and at 3.5-4% over 2025-27 if reform measures continue; cumulative real GDP growth of 14% over 2024-27

Standard Chartered Bank’s global research in its latest credit alert, says that Sri Lanka finally sees light at the end of the tunnel following last week’s breakthrough with commercial creditors.

It said Sri Lanka’s authorities and the ‘steering committee’, comprising 10 major bondholders, reached an agreement on the core financial terms of the restructuring of International Sovereign Bonds (ISBs).

The terms broadly follow the bondholders’ April proposal, with key differences including downward adjustments to the coupon and a change in principal reinstatement, which narrows the range of recovery values across the six restructuring scenarios.

Importantly, the parties agreed on a dual test on GDP for adjustments to the Macro-Linked Bonds (MLBs), based on Sri Lanka’s (1) average 2025-27 nominal GDP in USD terms (each GDP bucket has been adjusted upwards by c.5% compared to the April proposal), and (2) cumulative real GDP growth from 2024-27 versus IMF’s baseline growth assumption (11.1%). The dual test will not only account for real growth performance, but also for the FX impact on GDP in USD terms.

“Based on our assigned probabilities for the 12 GDP scenarios, we estimate probability-adjusted recovery values in the range of 57-71 at exit yields of 9%-13%. In our base case, we see a probability-adjusted recovery value of 64 at an exit yield of 11%,” SCB global research said.

“We remain Market weight on Sri Lanka while awaiting confirmation from the Official Creditor Committee (OCC) on comparability of treatment and from the IMF on consistency with the EFF’s debt sustainability objective,” it added.

The following are some of the observations in the SCB global research’s credit alert.



Assigning the probabilities:

• The average 2025-27 nominal GDP threshold is specified as $ 88.6 billion (IMF forecast) and the upward adjustment on repayments kick in if average nominal GDP crosses the thresholds of $ 92 billion, $ 96 billion, and $ 100 billion. Similarly, downward adjustments kick in if average nominal GDP for the 2025-27 period falls below the thresholds of $ 86.7 billion and $ 84.7 billion.
• USD-LKR remains a key variable for nominal GDP in USD terms. We expect gradual and modest LKR depreciation versus the USD, and project USD-LKR at 390 as of end-2027. This brings us to our projection of 2024 GDP in the $ 89-91 billion range and nominal GDP above $ 96 billion as of end-2027. We therefore assign a high 75% probability of average 2025-27 nominal GDP being above $ 92 billion.
• On real cumulative GDP growth from 2024-27, we see real GDP growth at 3% in 2024 and at 3.5-4% over 2025-27 if the reform measures continue, which brings us to a cumulative real GDP growth of 14% over 2024-27. Accordingly, we assign an 80% probability that cumulative GDP growth will exceed the baseline of 11.1%.
• Achieving an average nominal GDP of $ 100 billion over 2025-27 and 11.1% cumulative real growth from 2024-27 is likely highly correlated. We therefore adjust the probability of the ‘Upside no. 1’ scenario to 8.75%, which leaves the scenario where the nominal GDP target of $ 100 billion is met but real GDP growth is less than 11.1% at a probability of 1.25%.
• On the other hand, it is unlikely that average nominal GDP from 2025-27 falls below $ 84.7 billion (the threshold below IMF’s baseline no. 2) if real cumulative GDP growth is higher than 11.1% over 2024-27, as USD-LKR would have to depreciate by c.17% on an annualised basis over 2024-27 for this to pan out. We therefore assign a 0% probability to this scenario, which results in a 2.5% probability for scenario ‘Downside no. 2’.
  
   

The Joint Working Framework remains to be confirmed by the OCC to ensure comparability of treatment, as well as by IMF staff to ensure consistency with the parameters and debt sustainability objectives of Sri Lanka’s IMF EFF program. 

We have limited visibility on the timeline of achieving confirmation from the two parties.

However, in April, Sri Lanka sent a Request for Proposal to banks for the appointment of dealer managers, which could expedite the process of the exchange once the OCC and IMF confirm support for the ISB restructuring agreement.