Local Banks in a twist over Sri Lanka ISBs

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The heads of local commercial banks told Finance Today that their banks have invested in the International Sovereign Bonds (ISBs), issued by Sri Lanka and have decided to take collective action in terms of the external debt restructuring process, currently underway to safeguard their investment in these instruments which are denominated in dollars.

The heads of the relevant banks have already drawn attention to the possibility of settling their ISB investments in local currency in an effort to minimise their losses.

Finance Today inquired along these lines from the Central Bank of Sri Lanka (CBSL). Heads of some of the banks said, they have agreed to hold discussions with CBSL in this regard, the CBSL official said.

 Given the above circumstances, local bank heads stated that they have decided not to join the ISB Investors overseas and negotiate with Lazard, the Financial Adviser appointed by the Government to undertake the debt restructuring process but instead seek redress collectively through the Sri Lanka Banks Association.

It has also come to light that some local banks are focusing on the possibility of extending the tenures of maturing Sri Lanka Development Bonds (SLDBs), which are denominated in dollars, on a longer-term basis instead of being repaid in rupees on maturity.

The Government has decided not to restructure any domestic debt, including SLDBs.

So far, eight local commercial banks, mainly HNB, Commercial, BOC and NDB have identified themselves as having invested a total of US$ 1.6 billion in the ISBs. Makeup of this aggregate portfolio by Bank and Amount is not known. Neither are other details such as Date of Purchase, Years to Redemption, Price/Discount at the time of purchase, etc. How many of these banks are actually investors in the paper when originally issued and how many did so in the secondary market expecting a full payout is also unknown. It is also possible that not all banks are suffering in equal measure in that, in some banks the ISB investment could result in a heavy concentration well outside their limits while for others it may not.

Analysts say the banks may have to bear at least a 20-30 per cent “haircut” on their investment in the ISBs as a result of the debt restructuring process.

It is said that the financial institutions have allocated some 12-20 per cent of their investment in ISBs as bad loan provisions to cover impairment of the instruments while in restating the dollar denominated ISBs in depreciated LKR terms would result in translation gains.

By Ishara Gamage