Sri Lanka international bondholders may see 20% principal haircut – analysts

Holders of Sri Lanka’s international sovereign bonds face a 20% principal haircut in the country’s debt restructuring as well as maturity extensions and a reduction in coupons, according to a Barclays report.

Investors’ focus has shifted to the restructuring of Sri Lanka’s $13.4 billion sovereign dollar bonds after Colombo got final sign-off on a $3 billion programme from the International Monetary Fund (IMF) earlier this week, a financial lifeline in its bid to recover from its worst economic crisis in more than seven decades.
Barclays estimates investors holding the country’s sovereign bonds could see a recovery value - the percentage they recoup on their investment - in the mid-40s while exit yields could range from 12% to 15%.

An inclusion of instruments such as GDP-warrants which link payout to a country’s economic performance in the debt restructuring could potentially improve the recovery value to the mid-50s.

“Board approval of the IMF facility paves the way for bondholder talks and start of a debt-restructuring process,” Avanti Save at Barclays wrote in the note to clients. The island nation of 22 million people defaulted on its external debt with private creditors last year, and still needs to negotiate a debt restructuring with bilateral creditors such as India, China and the Paris Club.

Analysts at investment firm Tellimer put together “three baseline restructuring scenarios” with six-year maturity extension for all of them and nominal haircuts raging between 15% to 30%, with higher coupons corresponding to lower haircuts.

Each scenario “results in public debt falling to around 111% of GDP this year and below 95% by 2032,” the firm added, in line with the IMF’s debt to GDP targets.

“Each of the three baseline scenarios also implies roughly equal net present value relief of 23-28% at the IMF’s preferred 5% discount rate,” the Tellimer report added.

The firm added that it’s using higher exit yields -ranging from 12% to 14%- to calculate the debt restructuring scenarios amid a sharp rise in risk-free rates over the past couple of years combined with a rise in emerging market spreads in recent weeks.

Barclays also noted that the IMF’s restructuring scenario assumed that certain domestic debts will be reprofiled.

The IMF itself said in the programme published this week that Sri Lanka’s authorities are “weighing different options” on how to treat local currency debt under local law.

However, the nation’s state finance minister Shehan Semasinghe told Reuters that it was “too premature” to comment on a domestic debt overhaul as a final decision on whether such a restructuring would take place had not been taken.

The country’s international bonds have been trading at deeply distressed levels for months, with most between 37 to 39 cents in the dollar, according to Tradeweb data.