Sri Lanka asks dollar debt holders for 30% haircut

Sri Lanka is asking foreign investors in its international sovereign bonds to take a 30% haircut and is seeking similar concessions from holders of its other dollar-denominated bonds as it seeks to restructure its massive debt, its central bank governor said on Thursday.

The government will also exchange treasury bills into long-term bonds as part of a domestic debt restructuring programme, Nandalal Weerasinghe told a press conference as he unveiled details of the long-awaited plan.

Sri Lanka is struggling with its worst financial crisis since its independence from Britain in 1948 after the country’s foreign exchange hit record lows and triggered its first foreign debt default last year.

Pledging to put its mammoth debt burden on a sustainable track, Sri Lanka locked down a $2.9 billion bailout from the IMF in March. The domestic restructuring is needed to help the country reach the IMF programme goal of reducing overall debt to 95% of GDP by 2032.

Meanwhile, the government is also pushing forward with reworking its foreign debt with bondholders and bilateral creditors including China, Japan and India.

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

The first would be treatment similar to investors in the country’s international sovereign bonds — a 30% principal haircut with a 6-year maturity at a 4% interest rate, he said.

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

Sri Lanka currently has $12.5 billion in international sovereign bonds.

Domestic bondholders will be given two other options:

– Similar treatment to that being proposed to bilateral dollar creditors: No principal haircut, with a 15-year maturity and 9-year grace period at 1.5% interest rate.

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

Earlier on Thursday, the World Bank approved $700 million in budgetary and welfare support for the country, the biggest funding tranche for the island nation since the IMF deal in March. About $500 million of the funds will be allocated for budgetary support while the remaining $200 million will be for welfare support earmarked for those worst hit by the crisis.

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

The framework will cover part of the country’s $46.9 billion domestic debt, of which $27.8 billion is held as treasury bonds, according to latest Finance Ministry data.

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

The restructuring programme will be presented to parliament on Saturday for approval.

Reuters

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