Negotiations to lastly convey an finish to Sri Lanka’s long-running $13bn debt default might lead to an revolutionary new kind of bond that will hyperlink payouts to financial progress and governance reforms, a long-held goal of rising market bond buyers.
The bankrupt south Asian nation and its collectors have agreed in precept to interchange the debt, which it stopped paying in 2022 following a foreign money disaster, with so-called macro-linked bonds that will monitor the nation’s restoration.
The inclusion of GDP-tied payouts into bonds that may very well be included in main indices is a giant step forwards in attempting to develop debt constructions that can lure worldwide buyers again to riskier rising market nations desperately in want of financing, say analysts…
In return for taking a roughly one-third haircut on their unique debt, collectors have proposed a brand new $9bn bond with funds adjusted increased or decrease in 2028 relying on the typical US greenback GDP that Sri Lanka achieves. The nation has put ahead different methods of setting GDP-linked funds and can also be assessing a creditor proposal for a separate governance-linked bond. This is able to reduce coupon funds if the nation raises tax income assortment as a share of GDP and passes anti-corruption reforms.
As they emerge from defaults, nations akin to Ukraine and Uruguay have handed out equity-like warrants, which promise extra cash primarily based on components like actions within the value of commodities that the nation produces or GDP, as a manner of getting collectors to swallow debt losses.
Right here is the complete FT story by Joseph Cotterill, right here is an earlier Alex put up on Bob Shiller and associated concepts.
Addendum: Brad Setser feedback critically.
