Takeaways from the Debt Restructuring Presentation to Cabinet

Indicative terms of the DDO (Domestic Debt Optimization)

• T-bonds of superannuation funds proposed to be exchanged for longer maturity T-bonds (2027 to 2038), with a step-down coupon structure of 12% (till 2025E) and 9% till maturity.
• CBSL holdings of T-bills to be converted to T-bonds maturing between 2029 and 2038, with a step-down coupon structure. This will be implemented in Phase 2 of the DDO
• T-bill and T-bond holdings of the Banking sector has been excluded from the DDO considering the significant stress on the banking sector at present due to increasing NPLs, impact of an External Debt restructure and high taxation.
• 3 options presented for SLDBs (Sri Lanka Development Bonds) and FCBUs (Foreign Currency Banking Units) include:

1)      Treatment similar to ISBs (International Sovereign Bonds): 30% principal haircut with a 6-year maturity at 4% interest rate

2)      Treatment similar to official USD creditors: No principal haircut, with a 15-year maturity and 9-year grace period at a 1.5% interest rate

3)      Exchange for LKR instruments: No principal haircut with a 10-year maturity at SLFR  ( Standard Lending Facility Rate )     + 1% interest rate

Incentives for Participation

• In order to encourage participation of the Superannuation funds, non-participating funds will be subject to Income Tax rate of 30% (vs current rate of 14%), which will result in an average return of 7.7% (vs. 9.1% under a participating scenario).

Impact on GFN  (Gross Financing Needs)(period average between 2027E to 2032E)

• ?IMF target = 13% of GDP
• ?Current trajectory = 16.8%
• ?With External Debt restructure (EDR) only = 14.2%
• ?With EDR + DDO = 12.7%

Remaining timeline of DDO approval

29th June: Session 1 - Feasibility discussion with Government, Central Bank and COPF officials

29th June: Session 2 - Views and feedback on DDO by all creditors with the COPF

30th June: Further discussion with above parties and COPF approval to be granted

1st – 2nd July: Proposal tabled for debate (SW)