Sri Lankan bondholders brace for big losses in debt restructuring – The Island

Sri Lanka’s creditors stand to lose between a third and half of their investment in the country’s dollar bonds, after the government announced it would restructure $11 billion in debt, the first financial upheaval in its history modern, according to a report by Reuters. .

The report further said:

“Formal debt talks haven’t started, but analysts are already crunching the numbers to estimate the kind of haircuts that could be inflicted on bondholders.”

“Mired in the economic crisis, Sri Lanka has halted all external debt payments and is prioritizing its remaining hard currency reserves to purchase food and fuel.”

“The country of 22 million people has been hit by nationwide street protests and shortages of everything from electricity to medicine, and its dollar bonds are trading at deeply distressed levels of around 40 cents on the dollar.”

“With markets pricing in an International Monetary Fund (IMF) lending program as part of the debt overhaul, a $1 billion bond maturing July 25 is valued at around 45 cents on the dollar. , according to data from Refinitiv.”

“Meanwhile, Citi predicts that across bonds maturing between 2022 and 2030, Sri Lanka could seek a coupon discount of around 50%, a reduction of at least 20% in face value and maturity extensions between 10 and 13 years.”

“Assuming an exit yield of 11%, we estimate that the salvage value of dollar bonds in such a scenario could be in the low to mid-40s,” said Citi strategist Donato Guarino, referring to the interest rate at which the new securities will trade. the day of the debt exchange.

“Growing coupons – interest payments that increase over time – could also play a role ‘in giving the government more time to recover’ after restructuring, Guarino added, noting that they have been used in restructurings. Ecuadorian and Argentinian debt”.

“Tellimer analysts have assumed a 30% discount in their base case. They assign a salvage value close to 60 cents on the dollar for the bonds, with an exit yield of 8%.

“They also reported an alternate scenario with a salvage value of 42 cents and an exit yield of 16 percent.”

“Tellimer’s senior economist, Patrick Curran, considers a 50% haircut to be a ‘worst-case’ scenario, with salvage value as low as 30 cents for a 16% exit yield.”

“He pointed to the possibility that the debt overhaul might not be as quick as hoped.”

“While bondholders will enjoy some downside protection if negotiations are prolonged if interest is capitalized, extended delays will also be a more onerous starting point and political risk will increase exit yields, eroding potentially salvage values,” they added.

“Ratings agency S&P Global said debt talks could be complicated and take ‘several months’.”

“On Wednesday, it downgraded Sri Lanka’s foreign exchange rating to ‘CC’ from ‘CCC’ – two notches above the level indicating default – while Fitch downgraded its rating to ‘C’ from ‘CC’.

“JPMorgan analysts say the debt service moratorium should pave the way for an IMF program, but warn that a restructuring could be ‘more comprehensive’ than announced.”

“For now, the suspension of debt service covers only about 55% of the public debt, calculates Citi, noting that the latest IMF report hints at a “difficult program ahead”.

“The fund recommends tax reforms, and possibly restrictions on public sector wages and capital spending.”

“Asset managers BlackRock and Ashmore are among Sri Lanka’s leading holders of international bonds. They are part of a group of nascent creditors, White & Case acting as legal counsel.

Bondholders are in wait-and-see mode until the government chooses a financial adviser, said a creditor, speaking on condition of anonymity. According to a Reuters report.

Lynn A. Saleh