Inclusion of contingent instruments such as GDP warrants as an add-on in Sri Lanka’s debt restructuring would be “fairly expensive” without getting a lot in return, a sovereign debt restructuring expert said.
Brad Setser, Senior Fellow at the US think tank Council on Foreign Relations said that in Sri Lanka’s case the traditional use of GDP warrants in the debt restructuring is to provide a couple of cents at the end of the process to let investors who give up better face value have a possibility of getting full recovery.
“But I think treating the GDP warrant as an add on tends to mean the country gives away a certain probability of payments which tends to be often fairly expensive without getting a lot in return,” he said to Hawk-eyed Podcast.
He said that if the investors in fact, want a GDP warrant, they should be giving up on actual cash flows and GDP warrant should not be considered as a gift every investor gets for participating in the restructuring but as an option for investors, where investors who really want the GDP warrant would take fewer nominal bonds .
Setser noted that it would be technically easier for Zambia to link payment of a coupon to the global, for the price of copper which is something that is beyond Zambia’s control but really impacts Zambia’s capacity to pay.
In March, Bloomberg reported that Sri Lanka’s private creditors are considering a proposal to swap defaulted bonds with new securities that would have cash flow linked to the nation’s future growth. The report stated that under the plan, the security being mauled by Sri Lanka’s bondholders will pay less if growth falls to levels projected by the International Monetary Fund.
Central Bank Governor Dr. Nandalal Weerasinghe said that Sri Lanka’s economy is expected to contract by around 1-2% by the end of 2023, contrary to the IMF prediction of 3% contraction.
Moreover, he said although academics tend to be more fond of contingent instruments than most bond investors and added: “in most cases contingent instruments have been poorly received by the market and traded at a big discount relative to their underlying value.”
He said that contingent instruments can play more important roles in some debt restructurings, where they can be included in a big share of the bonds. “If you put a contingent instrument at the very end of a negotiation to give investors an extra two cents, it is not going to materially affect the country’s debt sustainability,” he said.
According to Setser, a contingent instrument needs to be in the majority of the debt.