Sri Lanka local currency ratings dip to 'Selective Default' 

THE message is mixed, but following a debt restructuring, S&P says it will likely raise its local currency sovereign ratings on Sri Lanka to reflect its post-restructuring creditworthiness . . .

COLOMBO -- Sri Lanka has confirmed a restructuring exercise on some of its local-currency-denominated Government bonds in what ratings agency Standard and Poor's, is classifying as a "distressed exchange."

The exercise is part of efforts to restore the sustainability of the government's finances," S&P says.

"As a result, we have lowered our local currency long- and short-term sovereign credit ratings on Sri Lanka to 'SD' (selective default) from 'CC/C', reflecting our opinion that the restructuring results in commercial lenders receiving less than originally promised, S&P says.

"We also lowered to 'D' our issue rating on Sri Lanka's October 2023 local currency bond that was included in the exercise.

"At the same time, we affirmed the other ratings on Sri Lanka, including the 'SD' long-term foreign currency sovereign rating.

On September 19, 2023, S&P Global Ratings lowered its long- and short-term local currency sovereign credit ratings on Sri Lanka to 'SD' from 'CC/C'. At the same time, S&P affirmed its other ratings on Sri Lanka, including the 'SD' long-term foreign currency rating. In addition, it lowered to 'D' its issue rating on Sri Lanka's local currency bond, maturing October 2023.

S&P says it does not assign outlooks to 'SD' ratings because they express a condition and not a forward-looking opinion of default probability.

"Our post-restructuring long-term sovereign ratings tend to be in the 'CCC' or low 'B' categories, depending on the sovereign's new debt structure and capacity to support that debt," it says.

"We lowered our local currency long-term rating on Sri Lanka to 'SD' following the government's confirmation of a domestic debt restructuring exercise to support the restoration of its public financial position.

"We view Sri Lanka's debt restructuring as distressed rather than opportunistic due to the Government's very high interest burden and local currency debt stock. In our opinion, the restructuring results in lenders receiving less than originally promised."

S&P says creditors participated in the restructuring of approximately 37% of bonds eligible for the transaction, amounting to Sri Lankan rupees (LKR) 3.2 trillion (US$10 billion).

"Bondholders involved in the restructuring were domestic superannuation funds.

"Our sovereign ratings do not reflect the government's capacity and willingness to service financial obligations to public sector enterprises or similar official creditors. However, we believe some of the superannuation funds that participated in the exchange offer are commercial creditors.

"Affected treasury bonds held by superannuation funds have been converted at face value, entailing no haircut on the principal of the notes. Participating investors would have received an equally-weighted basket of new bonds, which will help to smooth the government's maturity profile.

"They will also be eligible for a continuation of the current tax rate for superannuation funds on income from investments in treasury bonds, which is 14%, compared with a new rate of 30% for non-participants.

"The new notes will carry a step down in interest rate, from 12% through 2025 to 9% thereafter, and an implied extension of maturity in receiving the basket of new maturities. In our view, these changes caused investors in the affected notes to receive less than the original promise on the existing obligations.

"We also lowered the rating on Sri Lanka's October 2023 local currency bond to 'D' because this bond was included in the exercise.

"Following the debt restructuring, we will likely raise our local currency sovereign ratings on Sri Lanka to reflect its post-restructuring creditworthiness."

www.spratings.com (ATI).