Sri Lanka gains strong bondholder backing in debt restructuring

Sri Lanka has gained strong support from private creditors to restructure its international bonds, marking a crucial step toward resolving its extended default.

The government announced the preliminary results of its recent bond restructuring offer, launched on November 25, 2024, and closed on December 12, 2024. According to the results, 96% of bondholders agreed to the plan, covering bonds maturing between April 2023 and March 2030.

The proposal invites eligible bondholders to exchange their existing bonds for new securities or alternative considerations. Among the aggregated collective action clause (CAC) bonds, participation was high, with the $1.25 billion 5.750% bonds due in April 2023 receiving 98% participation and the $1.5 billion 7.550% bonds due in March 2030 achieving 99%. Similarly, 98% of holders of the $1.5 billion 6.850% bonds maturing in November 2025, under non-aggregated CAC terms, also agreed to the exchange. However, participation among holders of 2022 bonds was lower at 73%.

Final results of the exchange, including confirmation of settlement conditions, are expected on December 16, 2024. This restructuring effort, part of Sri Lanka’s strategy to tackle its $12.6 billion in dollar bonds, aims to complete the debt overhaul by the end of 2024.

The deal involves a 27% reduction in the nominal value of the bonds, extending maturity dates, lowering interest rates, and introducing “macro-linked bonds.” These bonds, maturing between 2030 and 2038, adjust payments based on the country’s economic performance. Another feature is a governance-linked bond, which offers a 75 basis-point coupon reduction on over $1.5 billion of debt if Sri Lanka meets targets such as increasing revenue collection.

For the agreement to be binding, at least two-thirds of bondholders had to consent, with a minimum of 50% approval for each bond and higher thresholds of 75% for certain bonds.

This restructuring is part of a $3 billion International Monetary Fund (IMF) loan program. The country has also restructured bilateral debts with China, India, and Japan, though details of those agreements remain undisclosed.

The process, initiated under the previous government, was finalized under President Anura Kumara Dissanayake, who assumed office on September 21, 2024, following months of negotiations after Sri Lanka’s economic default in April 2022.