Sri Lanka targets 30% haircut for international and domestic dollar bonds

COLOMBO (Reuters) – Sri Lanka is asking international bondholders to take a 30% haircut and is demanding similar concessions from investors in its domestic dollar-denominated notes as it seeks to restructure its massive debt, it said on Thursday. the governor of its central bank.

Unveiling details of the long-awaited plan, Governor Nandalal Weerasinghe told a press conference that the government would also swap short-term treasury bills for longer-term bonds as part of the overhaul covering part of the island nation’s $42 billion domestic debt.

Sri Lanka is grappling with its worst financial crisis since gaining independence from Britain in 1948 after the country’s foreign exchange reserves hit record highs and triggered its first default on its external debt last year. Widespread protests prompted by economic collapse forced former President Gotabaya Rajapaksa to flee the country last July.

Pledging to put its huge debt burden on a sustainable path, Sri Lanka locked in a $2.9 billion bailout package from the International Monetary Fund (IMF) in March, which is due for approval. a first exam in September.

Domestic restructuring is necessary to help the country meet the IMF program target of reducing overall debt to 95% of GDP by 2032.

Meanwhile, the government is also continuing to reshuffle its external debt with bondholders and bilateral creditors, including China, Japan and India.

The national plan announced on Thursday did not give details of Colombo’s offer to foreign lenders, but Weerasinghe said the government was offering the same terms to local and international creditors.

Under the domestic debt overhaul, holders of locally issued dollar-denominated bonds, such as Sri Lanka Development Bonds (SLDBs), will have three options, Weerasinghe said.

The first would be treatment similar to that offered to investors in the country’s international sovereign bonds – a 30% reduction in the principal owed to them, with repayment in six years at a 4% interest rate, it said. -he declares.

“We are asking foreign creditors for a 30% haircut, but that is still under discussion,” Weerasinghe said.

Sri Lanka currently holds $12.5 billion in international sovereign bonds. It also has $11.3 billion in bilateral loans.

The country’s international dollar bonds rose sharply on Thursday, with short-term issuance up 1.6 cents and trading at levels not seen more than a year ago.

The creditors’ committee representing Eurobond holders did not immediately comment on the proposal.

Weerasinghe would not comment on ongoing talks with bilateral creditors. Sri Lanka has set a target to finalize debt restructuring talks by September to align with the IMF review.

China wants multilateral lenders like the IMF and World Bank to absorb some of the losses – a demand these institutions and many developed countries, including the United States, are resisting.

Japanese Finance Minister Shunichi Suzuki said he was unaware of Colombo’s call for a haircut for creditors and said he could not comment on its debt restructuring.

MORE INTERNATIONAL SUPPORT

The domestic debt proposals will be presented to parliament on Saturday for approval.

Earlier Thursday, the World Bank approved $700 million in fiscal and social assistance for the country, the largest tranche of funding since the agreement with the IMF in March. About $500 million of the funds will be allocated to budget support while the remaining $200 million will be earmarked for social assistance to those most affected by the crisis.

As part of efforts to shore up its finances and enlist IMF support, the government has already raised taxes, cut spending and cut subsidies on goods such as fuel, and the economy is starting to show signs recovery.

Sri Lanka’s cabinet approved the domestic debt program at a special cabinet meeting on Wednesday, a source in the president’s office told Reuters.

National bondholders will have two other options:

– A treatment similar to that offered to bilateral creditors: No principal reduction, but the maturity would be extended to 15 years with a grace period of 9 years at an interest rate of 1.5%.

– Exchange their assets for instruments denominated in local currency: No principal discount with a 10-year maturity at SLFR (Sri Lanka Standing Lending Facility Rate) + 1% interest rate.

Local currency bonds held by pension funds, including pension funds, will be replaced with new bonds that will pay 9% interest, Weerasinghe added.

However, local currency bonds of banks have been excluded from the scheme to avoid putting further pressure on the financial sector.

(Reporting by Uditha Jayasinghe, additional reporting by Jorgelina do Rosario, Writing by Shilpa Jamkhandikar and Karin Strohecker; Editing by Himani Sarkar, Kim Coghill and Simon Cameron-Moore)

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