Holders of Sri Lanka’s defaulted sovereign bonds have been given sufficient incentives to participate in the exchange launched this week, according to Central Bank Governor Nandalal Weerasinghe.
Governor Weerasinghe stated that bondholders have strong reasons to join the exchange, including exchange fees and the introduction of macro-linked bonds. These bonds offer capital appreciation and coupon increases if the country’s GDP grows faster than expected, making the offer more attractive to bondholders.
“I do not think it would be in the best interests of anyone to hold out,” said Weerasinghe, emphasizing the significant benefits for investors. He added that successful exchanges in other countries have reached nearly 100% participation.
Sri Lanka has issued ‘state-contingent’ bonds linked to economic performance, and foreign bondholders, who own about 40% of the bonds, alongside local holders with around 12%, have expressed their intention to participate in the $12.55 billion bond exchange.
However, one holdout investor with $250 million in bonds, linked to a collective action clause issued before new rules were implemented, has yet to commit. Despite this, the IMF Managing Director has urged private investors to participate and help complete the restructuring.
Sri Lanka is restructuring its debt under a new debt sustainability framework designed for middle-income countries with market access. This follows a comprehensive domestic debt restructuring plan, which involved the central bank taking a hit to its balance sheet, thus avoiding a larger default on rupee bonds.
Following these efforts, interest rates fell by approximately 1,000 basis points on the day of the local debt announcement, and with the central bank’s deflationary monetary policy, interest rates continue to drop as economic activity resumes.