Sri Lanka Quick Update – Sri Lankan Airlines Bond Restructure – What does it mean?
Sri Lankan Airlines Restructures $175M Defaulted Bonds with 15% Haircut
After some rounds of back and forth across the last few months, the Ad Hoc Group of Bondholders of the Sri Lankan Airlines Bonds, who holds about 55% of the bonds, have come to an agreement in-principle to restructure USD 175 Mn worth of guaranteed bonds.
Based on the communication so far on this, a broad 15% haircut has been agreed for bond holders who volunteer for the restructuring and the rest will have a 25% mandatory haircut. While we did not spend a lot of time going into the details of this restructuring agreement, the big picture sense of this looks like the voluntary exchange will broadly have two components,
“bondholders could either convert their net holdings (after accounting for the 15% haircut) into some part in immediate cash and the rest as bonds that mature in 2028 or they could decide not to opt in for the voluntary exchange and receive bonds that would have a 10% higher haircut compared to the rest.”
Apart from this, the agreement in principle highlights that the government plans to allocate up to USD 60 Mn in the immediate cash tender offer for holders who opt for it. It also further states that if, for any reason, the full allocated USD 60 Mn is not used up in the exchange, some amount of the remaining cash would be used to pay a group fee for the Ad Hoc Group of Bondholders. While it is not yet clear how these group fees are being allocated, one particular uncertainty here is if there’s a situation where the allocated USD 60 Mn gets severely underspent, would that mean the ad hoc group would effectively get higher returns compared to the rest? Given the comparability of treatment for the EDR process, this could be something to watch out for which could cause a potential delay, given the communication on this so far seems vague.
While the exact timeline of the transaction is not clear yet, there are a few steps remaining ahead. The deal still requires the green light from the Official Credit Committee and IMF approval. In a situation where this does come in then the transaction will only move forward after the existing holders approve it through an extraordinary resolution at their meeting.
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