Sri Lanka has made significant progress in its efforts to exit bankruptcy, reaching an agreement in principle with the ad hoc group of bondholders, China Development Bank, and the Local Consortium of Sri Lanka (LCSL) to restructure approximately US $14.2 billion of sovereign bonds.
This milestone comes after the country declared a sovereign default in April 2022, marking its first such occurrence since independence in 1948. As part of its recovery plan, the government had to outline a strategy for debt sustainability.
Following its default, Sri Lanka secured vital support by negotiating agreements with bilateral creditors, including the Official Creditor Committee (OCC) led by Japan, France, and India, as well as the Export-Import Bank of China (EXIM), which collectively cover about US $5.9 billion of its US $37 billion external debt. The EXIM Bank also covers approximately US $4 billion in outstanding debts.
The recent negotiations involved discussions with the ad hoc group of bondholders and the China Development Bank, with Sri Lanka supported by its legal and financial advisors, Clifford Chance LLP and Lazard. The steering committee comprises ten of the largest members of the group, controlling around 40% of the aggregate outstanding bonds.
Additionally, the government has held discussions with the LCSL, which includes 11 members controlling about 12% of the total outstanding bonds, with the help of legal advisors Baker McKenzie and Newstate Partners LLP.
Through these efforts, Sri Lanka has achieved a total debt service relief of US $17 billion during its IMF program, which includes contributions from the OCC, EXIM Bank of China, China Development Bank, and bondholders.
State Minister of Finance Shehan Semasinghe expressed optimism, stating that the major obstacle to exiting bankruptcy has been cleared, and once the bond exchange is completed, the country’s credit rating is expected to improve.