ECONOMYNEXT – Standard and Poor’s, a rating agency, said it had downgraded Sri Lanka’s sovereign rating to “selective default”, a bond coupon payment was missed on US$1.25 billion of sovereign bonds.
Individual securities were downgraded to default of D, the rating agency said.
Sri Lanka has 30 days to make payment on the coupon which fell due on April 18.
“We do not expect the government to make coupon payments within 30 calendar days of their due date,” Standard and Poor’s said.
Sri Lanka does not plan to restructure its domestic debt.
“In our view, achieving a more sustainable fiscal position will require a restructuring of the government’s local currency debt,” S&P said.
“Sri Lanka’s local currency debt constitutes over 50% of its overall indebtedness and a considerable proportion of its very high interest burden to income.”
Sri Lanka’s domestic debt has however taken a massive haircut with the Rupee falling from 204 to 345 levels so far and inflationary revenues flowing into the government.
Bondholders are willing to roll over debt, but at high rates.
“Sri Lanka’s debt restructuring process is likely to be complicated and may take a long period of time,” the rating agency said.
“Negotiations with the IMF to establish a reform and financing program are in their early stages.
“The country has also experienced considerable political uncertainty in recent weeks and it is unclear whether the current government can maintain a majority in parliament.
“Failure to establish a sustainable government could further complicate and hamper progress in discussions with the IMF. This could ultimately delay a comprehensive reform program.
The full statement is reproduced below:
Sri Lanka’s Foreign Currency Rating Downgraded to ‘SD’ Over Missed Interest Payments on Sovereign Bonds
• On April 18, 2022, Sri Lanka defaulted on interest payments on its US$1.25 billion international sovereign bonds maturing in 2023 and 2028.
• We do not expect the government to make coupon payments within 30 calendar days of their due date.
• We downgraded our long-term foreign currency sovereign credit rating on Sri Lanka from “CC” to “SD” (Selective Default). At the same time, we lowered our issue ratings on the 2023 and 2028 bonds to ‘D’ (default) from ‘CC’. In addition, we confirmed our local currency sovereign ratings “CCC-/C” on Sri Lanka.
• The negative outlook on our long-term sovereign local currency rating “CCC-” of Sri Lanka reflects the high risk that the government will restructure its local currency debt in the face of economic, external and fiscal pressures in the country.
SINGAPORE (S&P Global Ratings) April 25, 2022–S&P Global Ratings today downgraded its long-term and short-term sovereign currency ratings on Sri Lanka from ‘CC/C’ to ‘SD/SD’. At the same time, we confirmed our long-term “CCC-” and short-term “C” sovereign ratings in local currency. The outlook for local currency ratings remains negative.
Our assessment of transferability and convertibility at ‘CC’ is unchanged.
Our exchange rating for Sri Lanka is “SD” (Selective Default). We do not assign an outlook to “SD” ratings because they express a condition and not a forward-looking opinion on the probability of default.
The negative outlook on local currency ratings reflects the high risk for commercial debt repayment in the context of Sri Lanka’s economic, external and fiscal pressures.
We may downgrade local currency ratings if there are indications of non-payment or restructuring of Sri Lankan rupee-denominated bonds.
We could revise the outlook to stable or upgrade the local currency ratings if we perceive that the likelihood of local currency government debt being excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding that gives it time to implement immediate and transformative reforms.
We would upgrade our long-term foreign currency sovereign credit rating following the government bond restructuring. The rating would reflect Sri Lanka’s creditworthiness after the restructuring. Our post-restructuring ratings tend to be in the “CCC” or “B” low categories, depending on the new sovereign debt structure and its ability to sustain that debt.
Amid soaring external funding pressures and increasingly widespread social and political protests, the Sri Lankan government announced on April 12, 2022 that it would suspend debt servicing on its foreign currency obligations. This includes coupon payments due April 18, 2022 for its 2023 and 2028 international sovereign bonds.
While the grace period for these bonds is 30 days, the government has announced that it will aim to restructure these external bonds and we believe its moratorium will prevent payment during this period.
Sri Lanka reportedly held meetings with IMF officials during the week of April 18, 2022, to negotiate an economic stimulus package and emergency financial assistance. Until the government can formulate a comprehensive debt restructuring plan, it will suspend servicing foreign currency-denominated debts to conserve limited foreign exchange resources for the purchase of essential imports.
Relevant debt includes international bonds, bilateral government-to-government credit facilities (excluding swap lines with the Central Bank of Sri Lanka), credit facilities with commercial banks and institutional lenders, and amounts payable by government or public sector entities upon request. guarantees. Obligations governed by Sri Lankan law may not be affected.
We would downgrade Sri Lanka’s other international sovereign bond ratings to “D” upon confirmation of non-payment of interest or principal on those bonds.
The government has publicly expressed its intention to continue paying its debts in local currency for the time being and its moratorium only affects bonds denominated in currencies other than the Sri Lankan rupee. Our long-term and short-term sovereign local currency “CCC-/C” ratings of Sri Lanka reflect the current severe economic and monetary pressures.
Although the central bank could technically create Sri Lankan rupees to meet upcoming obligations, this could have significant inflationary implications. Consumer prices have already risen at a rapid pace of 17.5% year-on-year in February.
In our view, achieving a more sustainable fiscal position will require a restructuring of public debt in local currency. Sri Lanka’s local currency debt constitutes more than 50% of its overall indebtedness and a considerable proportion of its very high interest burden relative to income.
The Sri Lankan debt restructuring process will likely be complicated and could take a long time. Negotiations with the IMF to establish a reform and financing program are in their early stages. The country has also seen considerable political uncertainty in recent weeks and it is unclear whether the current government can maintain a majority in parliament. Failure to establish a sustainable government could further complicate and hamper progress in discussions with the IMF. This could ultimately set back a comprehensive reform agenda.
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