Sri Lanka’s $12.55 billion international bond restructuring introduces a series of groundbreaking instruments designed to address economic challenges while incentivizing better governance and economic growth. These bonds, considered among the most complex in restructuring history, aim to provide debt relief if the economy underperforms while encouraging transparency and sound fiscal management.
Governance-Linked Bonds (GLBs):
The governance-linked bond is the first of its kind globally, rewarding Sri Lanka for achieving key governance milestones. If Sri Lanka surpasses IMF-set revenue-to-GDP targets for 2026 and 2027 (15.3% and 15.4%, respectively) and publishes its Fiscal Strategy Statement for both years, the bond’s interest rate will reduce by 75 basis points from late 2028. This reduction would save Sri Lanka approximately $80 million in interest payments over the bond’s lifetime, maturing in 2035.
Macro-Linked Bonds:
The macro-linked bonds adjust payouts based on Sri Lanka’s economic performance. Unlike previous instruments used by countries like Argentina and Greece, these bonds include both upside and downside scenarios:
- If Sri Lanka’s economy outperforms IMF baseline forecasts, capital and interest payments will increase.
- If economic growth underperforms, the bond’s principal could be reduced, offering additional debt relief of up to $2.1 billion, as calculated by bondholder advisers Rothschild.
To ensure fairness, cumulative real GDP growth (2024-2027) will act as a control variable, ensuring repayments align with genuine economic progress rather than currency appreciation.
Market Fit and Outlook:
Both bond structures have received approval from Moody’s, with Fitch and S&P expected to follow. Index eligibility, as confirmed for macro-linked bonds, ensures their attractiveness to institutional investors, increasing liquidity and reducing long-term borrowing costs for Sri Lanka.
Global Blueprint Potential:
Observers view these bonds as experimental tools that could reshape sovereign debt restructurings. While the success of these instruments depends on their market performance and price transparency, they may serve as a model for future issuers grappling with similar economic and governance challenges.
Source: Reuters
