African Reserves Loans

China’s moves in Zambia could offer a hint of restructuring in Sri Lanka

Protesters in Colombo, Sri Lanka on April 18, 2022. (Buddhika Weerasinghe/Bloomberg)

Holders of defaulted Sri Lankan bonds are keeping one eye on the South Asian nation’s biggest creditors and the other on an African debt deal for clues as to how the restructuring might unfold.

A $2.9 billion preliminary loan with the International Monetary Fund announced last week was not enough to trigger a rebound in the notes. They have been in free fall since the pandemic began in 2020 and defaulted earlier this year amid the worst economic crisis in the country’s history.

Now, investors’ attention is turning to China, India and Japan, Sri Lanka’s main bilateral creditors. Bondholders want to see how much debt relief these governments, which have key strategic and geopolitical interests beyond their investments, give the island.

“With private creditors, what the IMF needs are good faith negotiations on debt reprofiling. That’s enough,” said Petar Atanasov, director, co-head of sovereign research & strategy at Gramercy Funds Management. “But for official creditors the bar is higher, they need specific and explicit guarantees on terms that the IMF deems necessary.”

In the past, China has been slow to provide such guarantees, due to concerns about its underrepresentation in the IMF, Atanasov said. “So finding common ground on sovereign debt restructurings where China is a major creditor tends to take time,” he said.

For Sri Lankan noteholders, the restructuring talks in Zambia may offer some insight.

The African nation, which has become the continent’s first sovereign defaulter in the pandemic era, needs payment relief worth $8.4 billion through 2025, estimated at around 90% service of its external debt expected over the period. China reluctantly co-chaired Zambia’s official creditors’ committee, and nine months after a preliminary deal was struck, the IMF approved a $1.3 billion loan for the country.

Sri Lanka’s 2030 dollar bonds halved in value in the months after March 2020 when the pandemic took hold. the dollar. Bonds in the country have lost 40% this year, according to a Bloomberg index.

The number of countries whose dollar bonds are trading at distressed levels has more than doubled to 19 this year, with tighter global monetary conditions and Russia’s war in Ukraine leading many to predict a wave of sovereign defaults . Bonds from Argentina, Ecuador and El Salvador – which are current on their debt obligations – are trading near the 30 cent mark.

While the historical average for sovereign restructurings is 52 cents on the dollar, the country’s collapsing foreign currency reserves put it in a worse position than most, according to Carlos de Sousa, portfolio manager at Vontobel Asset Management in Zurich. JPMorgan Chase strategists, including Milo Gunasinghe, say recovery values ​​for long bonds will hover around 35 cents on the dollar.

For the IMF to release financial support, the Sri Lankan government must also obtain concessions from its private investors. Officials are working with financial and legal advisers on a debt restructuring strategy and intend to make a presentation to creditors in the coming weeks.

Rothschild & Co., the creditor group’s financial advisers declined to comment when contacted by Bloomberg. Blanc & Case, legal advisers to creditors, as well as Clifford Chance and Lazard – legal and financial advisers to the Sri Lankan government, respectively – did not immediately respond to a request for comment.

“Investors are hoping that with the help of the IMF, a rapid restructuring can take place,” said Philip Fielding, co-head of emerging market debt at Mackay Shields UK, which owns Sri Lanka bonds. “But the timing depends on how quickly bilateral creditors, including China and India, agree to a debt deal.”

Bloomberg’s Libby Cherry, Ronojoy Mazumdar, Anusha Ondaatjie, and Karl Lester M. Yap contributed to this report.