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Immediate risk of SL’s debt-adjustment event has eased: Barclays Investment Bank

In a report published by the Credit Research platform of Barclays Investment Bank titled “Sri Lanka: Making ends meet”, it has been stated that although Sri Lanka’s foreign reserves remain low (USD4bn at end-May 2021), the immediate risk of a debt-adjustment event has eased. 

“Sri Lanka has secured a number of liquidity lines and loans with foreign central banks and agencies, which have eased funding pressures through near-term access to foreign currency,” the report detailed.

Commenting on the efficacy of the front-end SRILAN bonds, especially the 6.25% 2021 and 5.75% 2022s, Barclays details that they have been key beneficiaries of the positive news flow around extra liquidity lines and loans being secured, which they assume has reduced the risk of a debt adjustment event.

“Bond prices reflect this: SRILAN 6.25% ‘21s and SRILAN 5.75% ‘22s are quoted at 97.25-98.50 and 92-25-94.25, respectively. In comparison the SRILAN 5.875% 2022s and 5.75% 2023s, which are quoted at 85.0-86.5 and 75.25-76.75, while the rest of the curve (2025 onwards) is trading around the 63-69 handle. We believe the relatively lower price points of the SRILAN 5.875% 2022s and 5.75% 2023s, which we view as short-dated bonds,” the report highlighted.

However, even though funding lines obtained in recent months have reduced the risk of an imminent debt adjustment, the report questions the sustainability of debt metrics, which will depend on Sri Lanka’s ability to boost economic activity in the next 6-12 months above pre-pandemic levels.

“Our medium-term concerns about the sovereign remain given its challenging external and fiscal position. Recent liquidity lines only provide stop-gap relief, hence we maintain an Underweight rating. In this regard, we believe a return of tourism will be key to support external flows and economic activity,” the report suggested.

Further, Barclays Investment Bank stated that it recommends the purchase of SRILAN 5.875% 2022s and 5.75% 2023s, which are quoted at 85.0-86.5 and 75.25-76.75, respectively, following recent falls.

The report assumes that the market was “spooked” by news that Ceylon Petroleum Corporation (CPC) had USD 2bn of loans with local banks that needed to be refinanced. However, it stated that it does not consider  CPC’s debt burden new news, as the risk from such large contingent liabilities, including those of the Ceylon Electricity Board (CEB), have been known for some time.

“In early May, the CPC already reported a LKR21.8bn FX loss. In our view, the recent weakness in SRILAN bonds was triggered by ‘risk-off’ sentiment post the June FOMC meeting as well as some payback given the Sri Lanka complex’s outperformance in Q2 after the PBoC swap line was confirmed,” the report explained.