Sri Lanka’s costly debt restructuring process set to commence in May

0
147

The heads of several international debt restructuring specialist firms, speaking to Finance Today, said that it will take at least a year to successfully complete Sri Lanka’s external debt restructuring process.

They are confident that it will take a minimum of one year based on Sri Lanka’s total external debt portfolio, ownership and other complexities of the debt stock.

It is estimated that the cost of obtaining the services of a financial advisor alone will be between USD 10-15 million.

While external debt restructuring remains a top priority for the Sri Lankan Government, domestic debt in the form of Government securities and Sri Lanka Development Bonds will not be restructured, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe said, addressing a media conference yesterday.

The CBSL Governor has promised not to favour Chinese creditors over western bondholders.  

Sri Lanka is in the process of restructuring about $51 billion in external debts in order to secure a USD3.5-4.5 billion IMF loan.

China has said it will not agree to restructure Sri Lanka’s current $ 5.1 billion debt owned by them.

Instead, they have agreed to provide refinancing loans or might seek debt for equity swaps.

Talks with creditors are due to take place in the coming weeks after appointing the Financial and legal advisers.

Around 50 applications have been received by the closing date in response to the two RFPs floated by the CBSL and the Ministry of Finance (MoF) for the two roles of financial and legal advisor covering the debt restructuring process of Sri Lanka, a CBSL official said.

Some of the leading independent debt and restructuring advisers such as Lazard, Rothschild, Citi and Deutsche Bank are among those that have submitted their applications in response to the RFPs, he said.

He said that out of these many applications, at least five could be considered as highly suitable institutions for the relevant service.

He said that a committee headed by the Assistant Governor of the CBSL, is currently examining the applications received for the appointment of Financial Advisors.

In addition, a committee consisting of officials from CBSL, MoF and the Ministry of Foreign Affairs has been appointed for the selection of the Legal Advisor.

The heads of several international debt restructuring specialist firms, speaking to Finance Today, said, “It’s good for Sri Lanka, it’s good for creditors, because in the current situation was a no-win situation. No one was benefiting.”

Agreements on restructuring sovereign bonds should be made with the Paris Club, with the London Club on syndicated loans, and with the G20 Group on loans from India, China and Japan.

In its Article IV consultation report, the IMF said that Sri Lanka faces ‘solvency’ issues. Its ‘debt overhang’, the report said will impede growth and threaten its macroeconomic stability.

Earlier this year, the head of the Paris Club group of wealthy creditor nations warned that China’s increasingly dominant role as a lender to poor countries deterred many from seeking debt relief.

For an example, about $6 billion of Zambia’s debt is owed to Chinese creditors, who helped finance a spending splurge that ended in crisis under sixth president of Zambia  Edgar Lungu. Zambia’s debt woes triggered the continent’s first pandemic-era sovereign default in 2020. Lusaka is now in the process of restructuring about USD15 billion of external debts.

Zambia’s current president has promised not to favour Chinese creditors over western bondholders as he seeks a resolution to the southern African nation’s debt restructuring process.

However, during the latest IMF/World Bank Spring meetings in April this year, People’s Bank of China Governor Yi Gang announced that the country was willing to join the IMF’s Common Framework to help restructure Zambia’s debt by June this year.

According to Zambian media reports, sources within the Zambian Treasury who attended the Spring Meetings said that Yi had indicated that China plans to co-chair the committee to have more influence on proceedings. They also said that Western lenders did not publicly state any opposition to China’s request.

By Ishara Gamage