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Global rating agency Standard and Poor’s (S&P) on Friday lowered Sri Lanka's long-term local currency sovereign credit rating from “CCC-” to 'CC'. This action comes in the backdrop of financially troubled Island nation taking steps to finalise the restructuring of some of its local currency treasury bonds held by superannuation funds. This rating indicates high vulnerability to non-payments.
The restructuring is part of the government's efforts to restore the sustainability of its public finances. The exchange offer proposed to bondholders, a segment of which are likely to be commercial creditors, will imply that participants will receive less than the original promise offered by their current notes, S&P said in a statement.
At the same time, it affirmed the other ratings on Sri Lanka, including the 'SD' long-term foreign currency sovereign credit rating. The outlook on the 'CC' long-term local currency sovereign credit rating is negative.
The government is expected to undertake two separate restructuring exercises that will affect debt held by the Central Bank of Sri Lanka (CBSL) and superannuation funds, which could include a segment of commercial creditors.
Affected treasury bonds held by superannuation funds would be converted at face value, entailing no immediate haircut on the principal of the notes. Participating investors would receive an equal-weighted basket of new bonds, which would help to smooth the government's maturity profile. They would also be eligible for a continuation of the current tax rate for superannuation funds on income from investments in treasury bonds, which is 14 per cent, compared to a new rate of 30 per cent for nonparticipants.
The government will seek parliamentary approval to raise the borrowing ceiling this year, and amend tax rates on income earned by superannuation funds investing in treasury bonds to facilitate the debt restructuring program, it added.
