Sri Lanka seals $12.5 billion bond reworking deal in pre-election run-up By Reuters

By Libby George, Karin Strohecker and Uditha Jayasinghe

LONDON (Reuters) – Sri Lanka has reached a draft deal with creditors to restructure $12.5 billion in international bonds, it said on Thursday, in a major boost to the island nation’s fragile recovery with just two days to go before the presidential election.

The country defaulted on foreign debt for the first time in May 2022, gripped by a severe crisis and reeling from its heavy debt burden and dwindling foreign reserves.

The deal comes after Sri Lanka began a third round of formal debt restructuring talks with bondholders last week. The country was forced to renegotiate parts of an earlier draft deal it announced in July after objections from the International Monetary Fund and official creditors. Obtaining signature from both is a prerequisite for executing the transaction.

It also finalized a preliminary $3.3 billion debt restructuring deal with China Development Bank, one of Beijing’s two main trade policy banks.

“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 the IMF-supported Sri Lanka Programme,” the Sri Lankan government said in a statement .

“Sri Lanka will continue to work with the OCC and its secretariat to ensure confirmation of compliance of the Agreement in Principle and the local option with the principle of comparability of treatment,” it added, referring to the Official Committee of Creditors.

Once Sri Lanka gets formal approval from both sides, it said it would make “best efforts to expedite the implementation of the bond restructuring.”

President Ranil Wickremesinghe said the IMF is likely to visit Sri Lanka two weeks after the election.

Its international bond prices rose as much as 2 cents by 1004 GMT to bid between 53.3-54.5 cents to the dollar, Tradeweb data showed.

But the country’s tight presidential race on Saturday cast some doubt over the fate of the final deal, as two front-runners expressed interest in changing certain terms of the country’s IMF bailout, which could also affect restructuring efforts .

REVISED TERMS

The latest draft deal raised GDP thresholds below which bondholders would receive higher payouts under so-called macro-linked bonds. The previous agreement would have triggered a GDP of $92 billion to $100 billion, while Thursday’s deal increased those targets to $94 billion to $107 billion.

It also reduced some of the coupon payments. But the par value reduction on existing bonds is 27 percent under the new deal, down from 28 percent under the deal announced in July.

In a nod to its base of local investors who hold international bonds, the proposal gives them the option to switch to a mix of US dollar-denominated bonds and local currency bonds. It would also allow the government to pay local holders in Sri Lankan rupees if it cannot make a dollar payment.

The new agreement also included a number of other clauses, giving bondholders the option to change the underlying law from New York to Britain or Delaware.

Lawmakers in the US state of New York, whose laws cover much of the issuance of debt in international emerging markets, have discussed a controversial bill that would make significant changes to debt restructuring and the rights of bondholders.

Sri Lankan leaders hailed the agreements as major steps forward in the country’s efforts to emerge from more than two years of default.

“At this point, Sri Lanka will officially come out of the temporary moratorium on foreign debt service,” Foreign Minister Ali Sabry said in a post on X. “In other words, as some people have mentioned, out of bankruptcy!”

Spokesmen for the Paris Club Secretariat, which handles communications for Official Creditors, the IMF and the Sri Lanka Local Consortium did not immediately respond to a request for comment. The Bondholder Ad Hoc Group Steering Committee declined to comment.