Sri Lanka to re-engage with private creditors imminently, sources say

By Karin Strohecker and Rodrigo Campos

NEW YORK (Reuters) -Formal negotiations between Sri Lankan authorities and international private creditors on over $12 billion in bonds are set to resume imminently after a group of bondholders signed non-disclosure agreements late last week, three sources told Reuters on Monday.

The resumption of the talks comes days after the International Monetary Fund board approved a $336 million installment of the IMF's $2.9 billion program. About $1 billion has already been disbursed.

A representative of the bondholders did not immediately respond to a request for comment.

Earlier, the group said its negotiating committee included Amundi Asset Management, BlackRock and its subsidiaries, Eaton Vance Management, Grantham, Mayo, Van Otterloo & Co (GMO) LLC, HBK Capital Management, Morgan Stanley Investment Management, Neuberger Berman, T. Rowe Price Associates Inc, and Wellington Management.

Separately, Sri Lanka said it will sign a debt restructuring agreement with a group of creditor nations on Wednesday - a major step to help stabilise the country's finances.

Sri Lanka in April rejected an initial bondholder proposal, citing some of its "baseline" assessments and a lack of a contingency option in the case of continued economic weakness as two main reasons for not reaching a deal.

Sri Lanka plunged into its worst financial crisis in more than seven decades in 2022 with a severe dollar shortage sending inflation soaring to a high of 70%, its currency to record lows and its economy contracting 7.3%. The IMF bailout secured in March last year helped stabilize economic conditions.

Avanti Save at Barclays Bank in Singapore said she expected the restructuring to be completed within months.

Barclays calculates that a debt restructuring could see bonds issued with a starting coupon of 4% that would rise to 8%, and maturities on the debt extended by 10 years. Combined with 20-30% in write down of the principal - a so-called haircut - recovery values could be close to the mid-50 cents in the dollar, Save said in a note to clients.

"We believe the sovereign may consider sweetening the deal for bondholders through creative recovery options for PDI and incorporating contingent payout structure (like VRI or MLB)," she added, referring to instruments where payout is dependent on economic performance or other variables.

Sri Lanka's international dollar bonds rose as much as 0.8 cents on Tuesday to trade around the 60 cents in the dollar threshold, Tradeweb data showed.

The island nation will hold presidential elections by mid-October.

(Reporting by Rodrigo Campos; Editing by Leslie Adler and Tomasz Janowski)