SL sees light at the end of the tunnel amidst debt relief deal with commercial creditors

By: Staff Writer

July 08, Colombo (LNW): Standard Chartered Bank’s global research in its latest credit alert, says that Sri Lanka finally sees light at the end of the tunnel following last week’s breakthrough with commercial creditors.

It said Sri Lanka’s authorities and the ‘steering committee’, comprising 10 major bondholders, reached an agreement on the core financial terms of the restructuring of International Sovereign Bonds (ISBs).

The terms broadly follow the bondholders’ April proposal, with key differences including downward adjustments to the coupon and a change in principal reinstatement, which narrows the range of recovery values across the six restructuring scenarios.

SCB sees probability-adjusted recovery value of 64 at 11% exit yield; remains ‘Market weight’ on Sri Lanka

Expects gradual and modest LKR depreciation versus the USD, and projects USD-LKR at 390 as of end-2027; projects 2024 GDP in $ 89-91 b range and nominal GDP above $ 96 b as of end-2027.

Estimates real cumulative GDP growth from 2024-27 at 3% in 2024 and at 3.5-4% over 2025-27 if reform measures continue; cumulative real GDP growth of 14% over 2024-27.

Importantly, the parties agreed on a dual test on GDP for adjustments to the Macro-Linked Bonds (MLBs), based on Sri Lanka’s (1) average 2025-27 nominal GDP in USD terms (each GDP bucket has been adjusted upwards by c.5% compared to the April proposal), and (2) cumulative real GDP growth from 2024-27 versus IMF’s baseline growth assumption (11.1%). The dual test will not only account for real growth performance, but also for the FX impact on GDP in USD terms.

“Based on our assigned probabilities for the 12 GDP scenarios, we estimate probability-adjusted recovery values in the range of 57-71 at exit yields of 9%-13%. In our base case, we see a probability-adjusted recovery value of 64 at an exit yield of 11%,” SCB global research said.

“We remain Market weight on Sri Lanka while awaiting confirmation from the Official Creditor Committee (OCC) on comparability of treatment and from the IMF on consistency with the EFF’s debt sustainability objective,” it added. The Joint Working Framework remains to be confirmed by the OCC to ensure comparability of treatment, as well as by IMF staff to ensure consistency with the parameters and debt sustainability objectives of Sri Lanka’s IMF EFF program.