Reluctant bondholders await debt restructuring

17 Oct 2021

Reluctant bondholders await debt restructuring

17 Oct 2021

BY Imesh Ranasinghe International sovereign bond (ISB) holders may have rejected the ISB buyback offer from the Central Bank of Sri Lanka (CBSL), as they were awaiting a possible debt restructuring to get a higher return, economists said. Speaking to us, Frontier Research Head – Macroeconomic and Thematic Research Chayu Damsinghe said that although the CBSL cited investor confidence as having played a smaller role in the rejection, bondholders were possibly holding out in anticipation of a possible debt restructuring. He said that bondholders were awaiting debt restructuring, as international banks and financial institutions had set their post-restructuring estimates for Sri Lankan ISBs at around 20-30% of its yields. So, if they were selling it at 50% of its yields, they could actually get 70-80% instead, he explained. The CBSL, in a press release on 11 October, claimed that the previously announced initiative to proceed with a buyback of the 2022 ISB will not yield a successful outcome, given the appetite of ISB holders to hold the ISBs issued by the Government. Under the “Six-month Road Map for Ensuring Macroeconomic and Financial System Stability” presented on 1 October, the CBSL claimed that it would gradually reduce the ISB exposure to around 10% of the gross domestic product (GDP) over the next three years. In line with this objective, the CBSL further provided that it would explore the possibility of buying back the entire issue of ISBs maturing in January 2022 and/or July 2022 in consultation with a number of international banks and lead arrangers, as they had observed the relevant ISBs to be trading at discounted prices during the month of September 2021. Damsinghe said that the CBSL wanted to buy back the bonds when they were trading at 40% and when it was unsuccessful, the reason they gave was that no one was selling at that amount. “The simple answer is that if the prices were at 50%, they (bondholders) did not want to sell it at 50% because they thought they could get a higher rate somehow,” he said. The CBSL further stated that there was no tangible interest from bondholders to sell the ISBs that were maturing in January 2022 at the discounted price that prevailed during the latter part of September 2021, and added that not even 5% of the outstanding ISBs maturing in January 2022 was available for sale at these discounted prices. Furthermore, Damsinghe said that if Sri Lanka opts for the restructuring process, at first, the country would stop paying the bonds and get all the creditors and bondholders together for negotiations according to the New York law. “This process of negotiation can take upto a year and after that, all the bonds from 2022 to 2026 will get pushed to the future. You might pay interest in the meantime, but you will start paying the principal amount after 2026,” he added. The reason as to why the CBSL decided to buy back ISBs at this moment, he said, could be to save about $ 700 million by buying at discounted prices instead of paying $ 1.5 billion for the ISBs maturing next year. However, he opined that the more realistic reason was for it to send a signal to the market internationally and locally, saying that even though the Government wanted to buy back, the bondholders did not want to sell, as they were confident that Sri Lanka was going to pay the full amount. The CBSL said that investor behaviour signified the continuing confidence of ISB holders regarding the ability of the issuer to honour its obligations and maintain its unblemished record of debt servicing, and that, therefore, the concerns raised by certain quarters regarding a possible vulnerability in 2022 were not reflected in the sentiments of the investors. “They are trying to get bilateral funding from different governments; this is also a signal to those parties that Sri Lanka is ready to pay and that we are a creditworthy country to lend to, despite what is happening,” Damsinghe added. Former Ceylon Chamber of Commerce Chairman Chandra Jayaratne said that bondholders had marked their ISBs as a loss in their books and will wait till maturity to get the maximum they could instead of going for discounted prices now. Reflecting on the Citi report in the CBSL’s short-term roadmap, he said that it was clear that Sri Lanka had lost credibility in the international arena. “We remain neutral on the credit. We view downside risks as high, especially as there is a non-negligible probability that Sri Lanka may attempt to restructure without the IMF (International Monetary Fund). We think the bonds might offer better value post a potential restructuring,” the Citi report said on the CBSL’s roadmap.

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Reluctant bondholders await debt restructuring

Reluctant bondholders await debt restructuring

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