Sri Lanka, which on Wednesday agreed a debt restructuring deal with its biggest Chinese creditor, is considering issuing a new type of instrument linked to how closely it meets targets set by the International Monetary Fund as part of its Eurobond restructuring, several sources told IFR.
The new bonds are being called macro-linked bonds or MLBs, as they would have similar characteristics to sustainability-linked bonds, in which payments change if certain targets are met or missed.
With MLBs, Sri Lanka would receive upfront debt relief if it fails to meet the targets under the IMF’s debt sustainability analysis, when such programmes are reviewed. This is a key measure for the IMF to decide how much financial assistance a country might need.
Holders of the MLBs would then agree to grant additional debt relief if needed to achieve the DSA target. In the case of Sri Lanka this would be either the ratio of its gross financing needs to GDP or simply debt to GDP.
Several countries that have restructured their bonds have included value-recovery instruments alongside conventional bonds. Most commonly these have been warrants linked to GDP growth that only pay out if there is outperformance of a target.
Argentina issued them in its 2005 restructuring, as did Greece in 2012 and more recently Ukraine in 2015. These instruments’ prices have gyrated wildly on speculation about whether they would pay out. Ukraine’s might do if the economy recovers sufficiently following last year’s Russian invasion.
Other countries have offered to link payments to commodity prices. Argentina considered this before its 2020 restructuring but decided not to after discussions with creditors. Suriname is considering the move as part of its current restructuring talks.
One source said a drawback of such instruments were they were upside-only and not able to be included in most bond indices and conventional fixed-income portfolios. MLBs as conventional instruments, with an independently verifiable measurement granting debt relief, would be.
A second source said other countries are considering including MLBs in their restructuring, such as Ghana, which is in talks with its external bondholders. Officials are due to meet investors in London on Monday.
“These instruments should be popular. No one can see into the future but these would allow adjustments depending on how well an economy meets its reform plans. That should speed up its restructuring,” said the second source.
Sri Lanka’s debt restructuring discussions are expected to accelerate now that Export-Import Bank of China has agreed to a “debt treatment” for US$4.2bn owed by the sovereign. Sri Lanka owes Chinese state-linked institutions more than US$7bn and this was the bulk of it.
The announcement on Wednesday surprised several restructuring experts at the IMF’s meetings in Marrakech, Morocco, as it was largely expected that other bilateral creditors, such as India or the Paris Club might reach agreement before China. “This could upset the apple cart,” said one analyst.
Unlike Ghana and Zambia, Sri Lanka is not using the G20’s common framework for its restructuring negotiations under which G20 members pledge to reach agreement together using a creditor committee before private sector talks start.
“China may have decided to go down this path in Sri Lanka as it has more flexibility since it is not using the common framework,” said the analyst.
The format is already being amended in practice since both Ghana and Sri Lanka have already agreed restructuring deals with domestic bondholders before official sector deals have been done.
Few details were released about the China Exim Bank deal with Sri Lanka. That could make it difficult for other creditors to reach agreement if it is unclear how much debt relief has been granted and how much other creditors might need to provide.
“The Sri Lankan authorities hope that this landmark achievement will provide an anchor to their ongoing engagement with the Official Creditor Committee and commercial creditors, including the bondholders,” Sri Lanka's finance ministry said in a statement.