Government disagrees with bondholders proposal

The Government is not agreeable to the proposal by the Ad-hoc group of bondholders to restructure commercial debt in the shape of new macro-linked bonds generous to investors, the Finance Ministry announced.

In a statement issued on Wednesday, the Ministry said that while acknowledging the proposal by the bondholders, the proposal has not received a favourable response from the Government.

“The authorities and their advisors intend to take the necessary time to consider the proposal and assess its compatibility with the parameters in Sri Lanka’s IMF-supported programme and the comparability of treatment principle, compliance with both of which is an imperative for the authorities,” it added.

The ministry further stated that the authorities have already expressed to the bondholders’ advisors their serious reservations about the construct of the macro-linked bonds proposed by the group.

Last week international media reported that an ad hoc group of bondholders, organised by advisers including Rothschild & Co, submitted a proposal to Sri Lanka that includes taking a 20 per cent haircut and issuance of new debt, including a so-called macro-linked bond.

“The authorities understand that the Group (bondholder group) may have diverging views on the GDP and exchange rate trajectories projected as part of the IMF-supported programme. The authorities are therefore ready to discuss a potential value recovery instrument if structured appropriately, taking into account the position of other creditors,” the statement emphasised.

Sri Lanka dollar bonds look attractive, and fair value for macro-linked could be in the high 50s to mid- 60-cents on the dollar if the proposal is accepted, Johanna Chua and Donato Guarino, strategists at Citi bank wrote in a note.

Macro-linked bonds are “a new instrument” whose payouts are linked to the evolution of Sri Lanka’s US$ nominal GDP.

The goal of this floating cash-flows structure is to comply with the Debt Sustainability Analysis targets embedded in Sri Lanka’s IMF Programme.

Citi estimates a lower probability that the smaller payout for macro-linked bonds — that would be triggered in a lower GDP growth scenario — will be triggered.

Citi said “that they think terms being proposed here are still subject to renegotiation by the government”.