Sri Lanka's Innovative Debt Restructuring Through Macro-Linked and Governance-Linked Bonds
Deal News | Dec 13, 2024 | Five Arrows Managers SAS
Sri Lanka has engaged in a debt restructuring process that involves the innovative use of Macro-Linked Bonds (MLBs) and Governance-Linked Bonds (GLBs). These novel instruments are designed to improve the fiscal landscape of the country while providing creditors with new options for investment. Sri Lanka's adoption of these bonds comes as part of a larger effort underpinned by the IMF's Debt Sustainability Framework, which aims to reduce the risk of future debt distress. MLBs are distinguished by their inclusion in bond indices due to their discrete adjustment mechanisms, which allows for balanced risk and reward scenarios for both creditors and the sovereign debtor. On the other hand, GLBs introduce governance as a performance metric for debt servicing relief, promoting good governance practices. These instruments signify a major step forward in state-contingent debt instruments and suggest a new template for future sovereign debt restructurings in emerging markets.
Sectors
- Sovereign Finance
- Investment Banking
- Emerging Markets
Geography
- Sri Lanka – The article is specifically discussing the debt restructuring efforts and innovations applied within Sri Lanka.
- Global – The financial instruments discussed, MLBs and GLBs, have global implications for sovereign debt markets and can influence similar contexts worldwide.
Industry
- Sovereign Finance – The article focuses on innovations in sovereign debt restructuring, specifically using state-contingent debt instruments such as Macro-Linked Bonds and Governance-Linked Bonds.
- Investment Banking – Rothschild & Co advised on the restructuring process, a typical role of investment banks in large scale financial transactions.
- Emerging Markets – Sri Lanka's use of new debt instruments positions it as an emerging market, influencing stakeholders in similar financial ecosystems.
Financials
- US$12.55 billion – Total amount of Sri Lanka's International Sovereign Bonds involved in the restructuring.
- Up to $5.2 billion – Maximum expected debt stock reduction for Sri Lanka under economic downturn scenarios.
- $9.5 billion – Total expected debt service payments reduction during the IMF program.
Participants
| Name | Role | Type | Description |
|---|---|---|---|
| Five Arrows Managers SAS | Private Equity Firm | Company | A global advisory firm contributing to the innovations in sovereign finance. |
| Democratic Socialist Republic of Sri Lanka | Target Country | Government | The government of Sri Lanka is undergoing a major debt restructuring involving MLBs and GLBs. |
| Rothschild & Co | Global Advisory | Company | Provided advisory services for Sri Lanka's debt restructuring process. |
| International Monetary Fund (IMF) | Debt Restructuring Partner | Government | Collaborated with Sri Lanka on the debt restructuring plan within the IMF's Debt Sustainability Framework. |