ECONOMYNEXT – SriLankan Airlines bonds could be hit by holdout creditors S & P Global Ratings said, as the defaulted bonds traded above par, reflecting investor perceptions of the outcome of ongoing restructuring efforts.
S&P upgraded Sri Lanka’s selective default rating to CCC+ with a stable outlook on September 19, after earlier waiting for SriLankan Airlines’ sovereign guaranteed bonds to be restructured even though the bulk of its sovereign bonds were successfully restrucrured.
“The upgrade reflects Sri Lanka’s recent efforts to complete the restructuring of its remaining commercial debt, including government-guaranteed Sri Lankan Airlines (SLA) bonds, following its December 2024 exchange of most of its Eurobonds,” S&P Global Ratings said.
“Negotiations on restructuring the SLA debt began earlier this year, with the airline and government making an offer based on comparability of treatment with other external creditors.
“We see a possibility that some lenders could become holdout creditors, making a further resolution in the negotiations unlikely, based on the passage of time.”
A committee of airline bond holders rejected an offer made by Sri Lanka in line with the restructuring of its sovereign bonds in early August.
However, SriLankan bonds at the time also started to trade above par at around 105 cents to the dollar, indicating that the expectations of the buyers regarding the recovery of principal and interest arrears.
The bondholders have shown some activism already, demanding full payment and threatening to liquidate the airline under the laws of Sri Lanka which have so far been stayed by court.
There have been commentary on the sovereign guarantee issued to SriLankan Airlines which was not covered by a collective action clause aggregating them with the rest of the bonds by the island, despite the process being in existence when the bonds were last renewed.
However, S&P said the SriLankan matter was unlikely disrupt the debt restructure process with the economy continuing to recover strongly.
“We believe this situation is also unlikely to disrupt or unwind the debt restructuring process, given the principles of comparability of treatment and the most-favored creditor clauses in Sri Lanka’s restructured bonds,” S & P said.
“The ratings on Sri Lanka are supported by its strong economic recovery, rapid fiscal consolidation and reform (supported by an ongoing IMF program), accumulation of foreign exchange reserves, an improving external position, and sustained progress in reducing fiscal risks from its state-owned enterprises (SOE).”
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Sri Lanka ran into a series of currency crises after the end of a 30-year civil war as rates were cut with inflationary open market operations when private credit recovered from the immediate preceding crisis, rejecting classical economic principles and instead following spurious econometric doctrines based on IMF backed ‘monetary policy modernization’ critics have pointed out.
At each crisis from targeting mid-corridor rates, with excess liquidity jettisoning scarce reserve regime, ratings were downgraded.
In the wake of IMF technical assistance Sri Lanka engaged in inflationary operations to target growth (close an output gap with printed money) instead of providing stability for economic agents and or the government to operate and went on a foreign borrowing spree as forex shortages emerged without war.
At the moment Sri Lanka’s central bank is operating a scarce reserve regime (after briefly descending to a excess reserve regime with a single policy rate that sharply reduced reserve collection) though concerns remain around inflationary swaps and the policy rate direction.
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Sri Lanka has had exchange controls for many decades indicating that the central bank’s operating framework is fundamentally flawed, rejects classical economics (primarily Hume’s price specie flow mechanism) and descents into trade controls when anchor conflicts worsen.
(Colombo/Sept20/2025)
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