IMF is awaiting further information on Sri Lanka’s ISB debt agreement.

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The International Monetary Fund has acknowledged the latest developments regarding the limited discussions between the Sri Lankan government and the Ad Hoc group of Bondholders.

Peter Breuer, the senior mission chief for Sri Lanka, stated that the IMF is awaiting additional details. They will evaluate the agreed terms to ensure they align with the parameters and debt sustainability goals set forth in the IMF-supported program.

According to a filing with the London Stock Exchange on Wednesday night, Sri Lanka and the Bondholders have reached terms on restructuring their debt obligations related to International Sovereign Bonds (ISBs).

The Sri Lankan government disclosed that discussions took place with the Bondholders’ Steering Committee from June 21 to July 2, 2024. The discussions involved legal and financial advisors from Clifford Chance LLP, Lazard, White & Case, and Rothschild & Co.

The Steering Committee, representing ten major bondholders accounting for 50% of the ISBs, convened in Paris on June 27-28 and agreed on fundamental financial terms for restructuring the ISBs. These terms are detailed in a Joint Working Framework that includes Governance-linked Bond features.

The framework requires endorsement from Sri Lanka’s Official Creditor Committee and IMF staff to ensure consistency with debt sustainability objectives.

As per the Joint Working Framework, a proposed 28% reduction in the nominal amount of existing bonds has been outlined.

International Sovereign Bonds (ISBs) are instruments used by countries to raise funds from global financial markets. Sri Lanka began utilizing ISBs after achieving middle-income status in 2007, despite facing higher interest rates.

Following a default on debt repayments in 2022, Sri Lanka is now tasked with addressing $12.5 billion in sovereign bond debt, with accumulated interest nearing $2.9 billion.

Recently, discussions centered on restructuring strategies for Sri Lanka’s debt involving a Steering Committee representing bondholders, alongside legal and financial advisors.

These discussions, under strict non-disclosure agreements, culminated in an agreement on restructuring the sovereign bonds.

The restructuring involves a complex process, simplified here for clarity:

• Outstanding interest totaling nearly $2.9 billion will be reduced by 11%, leaving approximately $1,678 million.
• New sovereign bonds will be issued for this adjusted amount, termed as plain vanilla bonds, with a 4-year maturity and a 4% coupon rate. Payments are set to commence from September 30th of this year.
• An additional payment of $225 million will be made as compensation for agreeing to the restructuring process.
• Repayment of over $8 billion of outstanding debt from 2028 onwards will be contingent on Sri Lanka’s economic growth, termed as Macro Link Bonds. The amount of debt reduction (up to 28%) will depend on achieving specific GDP targets.
• Another proposal involves restructuring nearly $2 billion of sovereign bond debt through governance-linked bonds, linking credit concessions to improvements in governance efficiency, with a proposed 0.5% reduction in debt.

Next steps include awaiting confirmation from Sri Lanka’s Official Creditor Committee (OCC) to align with the agreed terms and review by IMF staff to ensure consistency with Sri Lanka’s IMF-supported program. Once approved by both parties, the International Sovereign Bonds will undergo restructuring.