Sri Lanka favoured over Hamilton Reserve Bank

• Experts optimistic of positive outcome for SL
• Typical holdout strategy is to wait till debt is restructured: Lawyer

By Shenal Fernando

Experts are optimistic about a favourable outcome for Sri Lanka in the action instituted against it by Hamilton Reserve Bank (HRB).

The action was instituted by HRB, holder of Sri Lankan International Sovereign Bonds (ISBs), in the United States District Court for the Southern District of New York.

HRB claims a holdout stake exceeding 25% in Sri Lanka’s ISBs of $ 1 billion with a rate of 5.875%, due on 25 July 2022.

Speaking to The Sunday Morning Business, Attorney-at-Law Manjuka Fernandopulle, who specialises in sovereign debt restructuring and complex capital market transactions, stated that the usual holdout strategy was to wait until the debt of the other creditors had been restructured before intervening and seeking injunctions to halt payments to the other creditors, thereby disrupting the entire debt restructuring process.

However, in this instance, HRB filed its action at the outset of the debt restructuring process, which is a peculiar divergence from the traditional holdout strategy.

Explaining further, he stated: “Maybe these investors were assured payments or maybe they felt that the Government would chicken out and pay them in full. They may be looking at the playbook of the SriLankan Airlines bond investors.”

Similar views were expressed by University of North Carolina Professor of Law Mark Weidemaier and University of Virginia Professor of Law Mitu Gulati in June 2022, when they stated that it appeared that HRB may have overplayed its hand.

They noted that it was highly likely that the US District Court would favour Sri Lanka in interpreting the pari passu clause in a narrow manner, preventing obstruction of future payments. The reasoning is that if not, it will put a halt to Sri Lanka’s debt restructuring process because no creditor will negotiate with Sri Lanka when there is a Court Order stating that holdout creditors will get paid in full.    

A pari passu clause is a clause found in sovereign debt instruments guaranteeing equal treatment of all bondholders and that bondholders are in the same ranking as other unsecured creditors. 

Article 3.1 of the 25 July ISB clearly provides that the bonds “will at all times rank pari passu among themselves in all respects, without any preference of one over the other by reason of priority of date of issue or otherwise, and will at all times rank at least equally with all other present and future unsecured and unsubordinated external indebtedness”. 

The typical holdout strategy is to wait until the other creditors have agreed to take a significant haircut, which is highly likely in Sri Lanka’s instance, whereupon the creditor holding out will assert their claim at a stage when the other creditors no longer have a claim since they have agreed to the restructure.

In this action HRB is seeking a permanent injunction against Sri Lanka to make rateable payments to HRB if Sri Lanka pays the coupons due on the Sri Lankan Development Bonds (SLDBs), which Sri Lanka is currently seeking to keep out of the debt restructuring process and are currently not subjected to the external debt moratorium announced on 12 April 2022. 

If Sri Lanka were to make a coupon payment relating to one of its SLDBs and HRB is successful in gaining this permanent injunction, Sri Lanka will be liable to make a rateable payment, which will essentially require Sri Lanka to pay the principal and accrued interest in full.

Weidemaier further pointed out that in the Argentine situation, the injunction issued by the US District Court had been issued over a decade after the default and long after the economy had recovered. 

Furthermore, he said the US courts were probably influenced by the belligerent refusal of Argentina to pay or negotiate with those creditors and the need to bring them to heel. Moreover, since the Argentine injunction, US courts have been walking back the decision.

When contacted by The Sunday Morning Business, Treasury Deputy Secretary R.M.P. Rathnayake refused to disclose any information regarding the action and merely stated that all necessary preparations were being taken by Sri Lanka’s legal expert, Clifford Chance.