Introduction to Sri Lanka's Debt Restructuring

Sri Lanka is embarking on a groundbreaking debt restructuring process, involving $12.55 billion in international bond debt. This initiative is set to introduce a series of innovative instruments linked to economic growth and governance, marking one of the most complex restructurings ever arranged.

Governance-Linked Bonds (GLBs)

The GLB is a pioneering instrument designed to reward Sri Lanka for transparency and effective economic management by reducing the interest on its debt. To achieve this reduction, Sri Lanka must meet specific Key Performance Indicators (KPIs), such as exceeding baseline ratios set by the IMF for total revenue to GDP and publishing a Fiscal Strategy Statement.

Macroeconomic-Linked Bonds

These bonds represent a novel approach in fixed income instruments, with payouts linked to economic performance. Unique to this structure is the provision to adjust payouts both upwards for better-than-expected growth and downwards if the economy falls short of forecasts. The adjustment would come into effect in 2028, with IMF data serving as the baseline for measurements.

Market Integration and Future Prospects

For these new bonds to be widely held, they must be rated by major agencies and be eligible for key bond indexes. Moody's has already given both bond structures the nod, and the other agencies are expected to follow suit. The success of these bonds will be closely watched, as they could serve as a blueprint for other issuers if they function well in the market.