Sri Lanka repays $1 billion bond, ending default threat: Report

Sri Lanka has transfered funds to repay a $1 billion bond by the Tuesday deadline, keeping intact its reputation for honoring debt as concern mounts about the nation’s overseas financing.
 

The money was transfered Monday, Ajith Nivard Cabraal, the state minister for money and capital markets, said by phone. Moody’s Investors Service placed Sri Lanka’s ratings under review for a downgrade last week, citing its assessment of the country’s increasingly fragile external liquidity position and the risk of default.

“I have been saying right throughout that we will pay. Unfortunately some bondholders panicked due to rating actions and analyst reports and sold off at huge discounts,” Cabraal said in a separate interview Sunday. “Those who came last profited most.”

The yield on the 6.25% Sri Lanka dollar bond maturing Tuesday slumped to 500% earlier on Monday, from 628% last week. The yield on the 5.75% 2022 dollar bond rose by 34 basis points to 21.62%, and that on the 6.85% 2024 note fell by 2 basis points to 26.26%.

The payment marks the clearing of only the first test. Two more payments -- a $500 million bond and $1 billion of debt -- become due next year, with Colombo saying arrangements have been made for the transactions.

Doubts about Sri Lanka’s ability to service debt began growing last year after the International Monetary Fund prematurely ended a $1.5 billion loan facility in the midst of the pandemic. While steps to control the coronavirus’s spread hurt the government’s capacity to generate earnings through sectors such as tourism, a downgrade of the sovereign’s rating deeper into junk hit investors’ confidence.

The island nation has since secured a $1.5 billion currency swap agreement with China, besides negotiating funding lines from its South Asian neighbors India and Bangladesh.

Sri Lanka’s central bank earlier this month said that while the government is expecting some inflows, it will dip into its foreign exchange reserves to bridge any shortfall in repaying the bonds. The stockpile stood at about $4 billion in June, enough to cover about three months of imports.

“Any reserve fall will be temporary,” Cabraal said in a separate phone call late Sunday. “It will be buttressed in a planned manner with non-debt investments, which will not flow out.”

Some $200 million of the payment will return relatively quickly as the central bank will conduct swap transactions with domestic banks that hold about a third of the maturing debt, Cabraal said. He didn’t share further details on the swaps.