According to the Financial Times, Sri Lanka is exploring innovative debt restructuring measures, including the introduction of GDP-tied payouts into bonds, in an effort to attract international investors back to emerging markets. The country and its bondholders have reportedly agreed in principle to replace its $13 billion debt in default with macro-linked bonds that would track Sri Lanka’s recovery. Analysts see this move as a significant step forward in developing debt structures that appeal to investors, particularly those interested in riskier markets in need of financing.
An independent observer of the discussions between Sri Lanka and bondholders noted that the proposed bonds could set a precedent by embedding contingencies into bond structures eligible for major indices. The government has expressed its commitment to continue talks on the bond proposals with hopes of reaching common ground soon. As part of the proposed deal, creditors would take a haircut on their original debt in exchange for a new $9 billion bond with payments adjusted based on Sri Lanka’s average US Dollar GDP achieved by 2028.
While the proposals aim to address the country’s debt restructuring needs, they face skepticism among some investors due to past challenges with linking payouts to volatile economic factors like GDP. Instances from Argentina and El Salvador serve as cautionary tales, highlighting the complexities and risks associated with such instruments. However, proponents believe that macro-linked bonds could bridge the gap between creditors and debtors and offer a viable solution for both parties. Despite concerns, some investors see these bonds as essential for attracting investors back to the sovereign debt market.
In Sri Lanka’s case, the proposed macro-linked bond’s payout would depend on the country’s US dollar GDP performance, with different scenarios dictating varying payback amounts. The success of these bonds hinges on Sri Lanka’s economic recovery and its ability to meet GDP targets in the coming years. While challenges remain, proponents remain optimistic about the potential of these innovative debt structures to address Sri Lanka’s financing needs and restore investor confidence in the market.