Private bond holders of Sri Lanka’s sovereign debt are dismayed and extremely frustrated over the alleged lack of engagement on the part of the Government.

According to sources familiar with the matter, the majority of the bond holders have complained that since the first review of the IMF, the Government nor its advisors have engaged with them.

This is contrary to claims by the Government that negotiations with commercial creditors in good faith have been progressive and overall external debt restructuring will be completed soon.

Though in December, President Ranil Wickremesinghe said officials will hold negotiations in London with private creditors, sources close to bond holders said there has been no meeting so far nor have they been notified of any in the future.

Of the total external debt subject to restructuring worth $ 37 billion, private creditors share is $ 20 billion. The share of International Sovereign Bonds (ISBs) held by international bond holders is $ 12 billion. 

The delay in finalising, according to analysts, has increased the amount to $ 13 billion with accrued interest.

The Ad Hoc Group of Sri Lanka Bondholders which accounts for over 55% of the commercial debt, way back in October last year, committed to working with the Sri Lankan authorities as quickly as possible to find a sustainable solution to Sri Lanka’s debt challenges as they relate to its international bond debt.

In November, after reaching agreement with Official Creditor Committee (OCC) Treasury Secretary said Sri Lanka now intends to focus its efforts on reaching comparable debt restructuring agreements with external commercial creditors, and in particular with its holders of international sovereign bonds. “Good faith engagement is still ongoing in that regard, and the authorities would like to invite its bondholders to now accelerate the discussions with a view to coming to a mutually acceptable agreement as promptly as possible.” That was the last statement with regard to external commercial creditors.

Sources told the Daily FT that private creditors wished the Government and its advisors had the same enthusiasm it demonstrates with official creditors. “Claims of the Government making good progress is a ‘distortion’ and damages credibility and image of Sri Lanka,” they alleged.

“Bond holders are extremely frustrated by the lack of desire to engage firstly and secondly the lack of communication on the part of the Sri Lankan authorities,” they said. Lack of transparency was also cited as a concern. Sri Lanka’s Financial Advisors are Lazard and Legal Advisor is Clifford Chance, who are also engaged with three other nations’ under-going debt restructuring; Zambia, Ghana and Ethiopia. 

It was pointed out that the Ad-Hoc Group which consists of serious and long-term bond holders, proactively shared its proposal for a consensual outcome. “The bond holders have been extremely patient and committed to cooperate in reaching an amicable solution,” they added. Sources cited how countries such as Ghana are knocking on the doors of private creditors to fast track agreements. “It appears Sri Lanka doesn’t seem to care anymore in reaching consensus with private creditors,” sources opined.

Sri Lanka is also running out of time to reach a settlement as separately it is being sued by the Hamilton Reserve Bank in the US on account of ISBs worth $ 250 million. The US Court has given time till end February 2023.

IMF requirement

Reaching an agreement in principle with private creditors that is compliant with the IMF Debt Sustainability Analysis (DSA) targets and comparable across different creditor categories is also a requirement by the International Monetary Fund (IMF) for a successful second review. The other is converting financing assurance from bilateral creditors into actual agreements.

“So our understanding is that negotiations are ongoing, proposals are being exchanged, and it is important for that process to continue and be completed as quickly as possible. It’s our strong expectation that there would be an agreement in principle by the time of the second review,” said IMF Staff Mission Leader Peter Brauer a fortnight ago to the media following the completion of a visit from 11 to 19 January.

“Our strong expectation is that an agreement in principle would be reached with the commercial creditors by the time of the second review. As you may recall, we need to see a path towards restoring debt sustainability in Sri Lanka. For IMF lending, that’s a precondition. And so it’s really important for that process to be completed soon,” Brauer reiterated.

Under the IMF’s $ 3 billion four-year Extended Fund Facility program, Sri Lanka has so far received $ 670 million via two tranches since March 2023.

Ad-Hoc Group proposal and Sri Lanka’s response

The Ad-Hoc Group, acting through its Steering Committee, in October proactively submitted its own restructuring proposal relating to Sri Lanka’s outstanding international bonds. The proposal, which provides upfront debt relief, includes a menu of new securities that would be offered to the holders of the existing bonds, including a “Macro-Linked Bond” (MLB).

The Group said the MLB is an innovative new instrument that is designed to be liquid and index-eligible and whose payouts are linked to the evolution of Sri Lanka’s gross domestic product. This design seeks to ensure both that the instrument is acceptable to bond market participants and that its cash flows will at all times comply with the Debt Sustainability Analysis targets embedded in Sri Lanka’s IMF Program in a range of future macroeconomic scenarios.

The Group believes that its proposal, including the MLB, will contribute to restoring Sri Lanka’s debt sustainability and, at the same time, will command broad support from existing holders of Sri Lanka’s international bonds. The Group is advised by Rothschild & Co and White & Case LLP, as financial and legal advisors, respectively.

In response, the Government said the Group’s proposal has not received a favourable response from Sri Lanka.

Finance Ministry in a statement said the authorities and their advisors intend to take the necessary time to consider the proposal and assess its compatibility with the parameters in Sri Lanka’s lMF-supported program and the comparability of treatment principle, compliance with both of which is an imperative for the authorities.

The authorities have already expressed to the bondholders’ advisors their serious reservations about the construct of the Macro-Linked Bonds proposed by the Group.

Sri Lanka invites the Group to further engage with the country’s debt advisors, under existing NDAs, to progress the matter in a reasonable and viable way. It is the authorities’ belief that the indicative debt restructuring scenario shared with commercial creditors in May 2023 provided a robust basis for engagement.

The authorities understand that the Group may have diverging views on the GDP and exchange rate trajectories projected as part of the lMF supported program. The authorities are therefore ready to discuss a potential value recovery instrument if structured appropriately, taking into account the position of other creditors, the Finance Ministry statement added.

This article was first published in the Daily Financial Times, Sri Lanka.