Hamilton Reserve is seeking local rupee settlement

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If Sri Lanka is unable to settle its maturing International Sovereign Bonds (ISB) in dollars, Hamilton Reserve Bank (HRB), a St Kitts and Nevis-based Bank that has sued the country in a US Court demanding payment, has now requested that it be settled in local rupees, sources close to HRB told Finance Today.

A delegation from HRB which was in Sri Lanka recently is reported to have made this request after meeting with Sri Lankan officials. Nevertheless, Sri Lankan authorities are reported to have rejected this request as government debt restructuring programme is still in progress.

The debt sustainability analysis (DSA)  relating to the debt restructuring process in Sri Lanka was created and completed in compliance with the guidelines  of the International Monetary Fund (IMF) . According to DSA, Lazard, Sri Lanka’s financial consultants will disclose the relevant debt restructuring process to all creditors in the future. According to reports, connected ISB holders will have to consent to a 30% to 40% ‘hair-cut’ for ISB investments. Sri Lanka has 12.6 billion US dollars in Bonds.

Domestic and foreign ISB holders already appointed international legal experts in preparation for the debt restructuring process. Sri Lankan Banks have also already made around 20% provisions for their ISB investments.

“Under our unified debt restructuring programme, we cannot follow a separate debt settlement process for HRB or any other creditor. Regardless of whether the creditors are private or bilateral, we must apply the same equal debt restructuring policy to all creditors,” government sources said in the meantime, without referring to HRB’s request.

Government sources also claimed that the Government was forced to reject another billion-dollar refinancing facility offered by China in respect of the China Development Bank’s one-billion-dollar loan maturing this year.

HRB, which holds more than $250 million in Sri Lanka’s 5.875% ISBs due 25 July, filed the claim in late June in a New York Federal Court, seeking full payment of principal and interest. The Bank owns more than 25% of the Bonds, allowing it to veto any unfavourable changes to the notes under the terms of the indenture.

It is alleged that HRB made the related investments despite the considerable risk in order to achieve large capital gains when Sri Lanka’s ISBs are sold at a heavily discounted price in the secondary market as was done in the recent past. “They could have earned a significant capital gain from their investment in Sri Lanka’s $500 million ISB settled in January under extreme difficult circumstances”. According to sources, “depending on the assurance they obtained from that investment, they may be blindly persuaded to make large investments in the ISBs that matured on July 25,” analysts said.

However, the Sri Lankan authorities have yet to confirm who the final recipients of the $500 million ISB that matured in January are. Because the Sri Lankan government has been unable to identify who the final beneficiaries are since the ISBs were last traded in the Singapore secondary market. The Central Bank of Sri Lanka only has comprehensive information on the investors who purchased the initial ISB issue. On general, Sri Lankan ISBs are traded in global secondary markets. According to Sri Lankan officials, their ownership changes almost every transaction, making it difficult to gather information on their ultimate receipts from key overseas markets on their maturity date.

However international fund managers opined that such ownership data is maintained by the bond trustees and the issuers (in this case the Sri Lankan government) can request for such information from the trustee.

Meanwhile, HRB argued in their US Court filing that it is unlawful for Sri Lanka to temporarily suspend its external debt servicing from April 12, 2022, given that provisions for the settlement of the relevant maturing ISBs had been made aside in Sri Lanka’s Budget for the year 2022.

As a result, in a context where confidence in the 2022 Budget has been completely undermined by manipulated data and unrealistic predictions, it has been the main challenge of Sri Lanka’s Attorney General’s Department to justify the temporary suspension of Sri Lanka’s external debt servicing from April 12, 2022 in the US courts with the assistance of their international legal experts, legal analysts said.

Legal scholars believe that if the case is decided against the Sri Lankan government, its assets could be frozen.

 When Finance Today enquired about this, Ministry of Finance officials stated that Sri Lanka’s external debt servicing was very poor since December 2021, a month after presenting FY2022 budget. The only viable solution to the balance-of-payments situation at that moment was to seek assistance from the IMF as Sri Lanka had lost access to global capital markets due to credit rating downgrades. However, the then-Sri Lankan government refused IMF aid, worsening the country’s foreign exchange crisis with significant import restrictions and shortages of essential goods.

By Ishara Gamage