Sri Lanka, ad hoc group make progress, wrap initial discussions

Chicago, April 16 – The Republic of Sri Lanka reported on the conclusion of initial restricted discussions with members of the ad hoc group of bondholders regarding its international sovereign bonds in a cleansing notice on Tuesday.

Discussions have taken place over the past three weeks. Sri Lanka has been represented by legal and financial advisers Clifford Chance and Lazard, respectively. The bondholder group has been represented by White & Case and Rothschild & Co.

The group controls around 50% of the international bonds.

The discussions focused on the group’s latest debt treatment proposal submitted on March 11 and specifically a proposed macro-linked bond.

Four items related to a macro-linked bond are subject to adjustment from the March 11 proposal.

From the discussions, the baseline parameters of the instruments proposed by the group were calibrated by reference to the group's “alternative baseline,” rather than Sri Lanka's IMF-supported program baseline.

Second, the groups debated the balance of risk between Sri Lanka and holders of the bonds if the country underperforms IMF GDP projections and greater protections for Sri Lanka in such a scenario.

The steering committee is willing to amend the first two items if Sri Lanka agrees to a consent fee, currently suggested at 1.8% of the outstanding principal amount of the bonds.

Third, the parties debated a test for triggering upward or downward adjustments in the macro-linked bond.

And, the fourth subject of debate was the share of additional value in an upward adjustment scenario.

In return for the steering committee relenting on the first two items, Sri Lanka was willing to concede to the group’s proposal on the third and fourth items.

The republic submitted a counterproposal on March 25.

During the discussions, the group proposed a governance-linked bond, shared with the government’s advisers on April 3.

The International Monetary Fund weighed in and reviewed both initial proposals and concluded that the debt treatment scenario included in Sri Lanka's proposal was consistent with the IMF-supported program debt sustainability targets, while the scenario included in the group's March proposal was not. The findings were preliminary, and subject to final evaluation after the proposals are final.

Currently, the proposals are going to the IMF for a second review.

The republic reported that despite constructive discussions, the parties did not come to an agreement regarding restructuring terms.

The steering committee did not agree to an extension of the restricted discussions; therefore, the republic released an update regarding the discussions.

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