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Sri Lanka Secures Major Support from Private Creditors to Restructure International Bonds

Sri Lanka has garnered extensive backing from private creditors to restructure its international bonds, marking a significant step towards resolving its prolonged debt default.

The Government of Sri Lanka announced the indicative results of its recent consent solicitation and invitation to exchange, launched on November 25, 2024, targeting the country’s existing bonds. The initiative has seen substantial bondholder participation ahead of the December 12, 2024 deadline.

According to the preliminary figures, holders representing 96% of the principal amount of the outstanding bonds have provided instructions. These bonds include various maturities, ranging from April 2023 to March 2030. Notably, the participation rate for the $1.25 billion 5.750% bonds due in April 2023 reached 98%, while the $1.5 billion 7.550% bonds due in March 2030 recorded 99% participation.

The debt exchange allows eligible holders of both aggregated and non-aggregated collective action clause (CAC) bonds to swap their securities for new instruments or alternative considerations. However, participation among holders of 2022 bonds was lower, at 73%.

The final results of the invitation, including the satisfaction of settlement conditions, are expected to be announced on December 16, 2024. Upon confirmation, the restructuring will be completed before year-end, allowing Sri Lanka to finalize a crucial component of its economic recovery plan.

The agreement follows the country’s default in April 2022 and comes after protracted negotiations that resulted in a 27% haircut on the nominal value of the existing bonds. The deal also postpones bond maturity dates, lowers interest rates, and introduces macro-linked bonds—a first in global debt restructuring. These bonds tie payments to Sri Lanka’s economic performance, enabling adjustments for investors based on a one-time economic test for notes maturing between 2030 and 2038.

Additionally, the restructuring includes a governance-linked note that offers a 75 basis-point coupon reduction on over $1.5 billion of debt if the country achieves specific governance targets, such as improving revenue collection.

The agreement required the consent of at least two-thirds of outstanding debt holders to be binding on all creditors, with a minimum 50% approval threshold for each note. For three bonds, a higher voting threshold of 75% was necessary.

The debt restructuring with private creditors was a critical requirement under the $3 billion IMF loan program. Sri Lanka has also restructured its bilateral debt with major creditors like China, India, and Japan, though details of those agreements remain undisclosed.

While negotiations began under the previous administration, the deal was finalized under the leadership of President Anura Kumara Dissanayake, who assumed office on September 21, 2024.

The successful restructuring underscores the bondholders’ confidence in Sri Lanka’s economic recovery and marks a turning point in its efforts to emerge from the financial crisis.

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