Thursday, March 30, 2023

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SL continues rolling over Development Bonds amidst lawsuit for default  

Sri Lanka has been rolling over USD-denominated Sri Lanka Development Bonds (SLDB), and has been settling SLDB maturities in local currency although the lawsuit filed by Hamilton Reserve Bank demanding  repayment of the principal amount of US $250.19 million plus interest, which the bank holds at present still pending.  

Declaring the preemptive debt default of the country on April 12, 2022, Central Bank Governor Nandalal Weerasinghe said that Sri Lanka has not defaulted on its local currency bonds, according to the local news reports.

Hamilton Reserve Bank has claimed in a suit filed for repayment of the principal amount of $250.19 million plus interest, which the bank holds, of the defaulted and accelerated New York law governed $1 billion 5.875% bonds due July 2022 (Bonds) issued by the Sri Lankan government.

It has sought injunctive and declaratory relief to address Sri Lanka’s alleged “continuing violations of the Bonds’ pari passu (equal treatment) requirement[,]” in respect of its “External Indebtedness” — i.e. the sovereign’s debt issued in any currency other than Sri Lanka’s, as covered in Reorg’s legal analysis.

According to Hamilton’s petition, by “excluding the USD-denominated Sri Lanka Development Bonds from the planned debt restructuring, Sri Lanka has made clear that it will pay the Sri Lanka Development Bonds in full, even as [Hamilton’s] Bonds remain unpaid [,]” and [u]surprisingly, the Sri Lanka Development Bonds are largely held by favored domestic (Sri Lankan) banks,” as covered in the analysis.

During the call, Sri Lanka’s legal advisor Clifford Chance informed creditors that it has filed a memorandum of law on Sept. 21 last year in support of its motion to dismiss the claims filed by Hamilton Reserve Bank informed sources said.

The initial pre-conference trial was held on Sept. 28, informed sources said without announcing the next date of hearing of the debt default case. .

Sri Lanka Development Bonds, dollar denominated bonds sold to domestic buyers have been excluded from a planned restructuring, Central Bank Governor Nandalal Weerasinghe said after announcing a suspension of payments of external debt on April 12 , 2022..

“SLDBs are domestic debt,” Weerasinghe said. “But we ask them to re-finance them. They are also financed by the money of expatriate workers.”

Sri Lanka Development Bond holders are mostly banks and the government may have had to inject capital to banks if they are given hair cuts, cancelling the effect of any hair cuts.

Out of 1.79 billion dollars of SLDBs outstanding, 1,593 million dollars were held by domestic banks, some 166 million by non-banks and 13.2 million dollars by individuals.

Some individuals and exporters bought SLDBs after the threshold was lowered to 1,000 US dollars.

SLDB purchases are mostly financed by foreign currency deposits of expatriate workers and others, though some banks also have net balances in their offshore banking units.

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