Dollar Bonds Slide Amid Election and Debt Deal Uncertainty

(Bloomberg) Sri Lanka’s dollar bonds are drifting lower on investor concern that the completion of a debt restructuring agreement with creditors could be pushed back by next month’s presidential election.

The country’s dollar bonds due in 2030 traded below 55 cents on the dollar on Wednesday, down from 59 cents in mid June. This month, Sri Lanka has the worst performing emerging-market debt following Lebanon, according to indexes compiled by Bloomberg.

Sri Lanka struck a preliminary deal with private investors in July to restructure $12.6 billion of bonds — an agreement which needs to gain backing of the International Monetary Fund and bilateral creditors such as China and France. A month later, the South Asian nation’s government requested more details regarding the IMF’s assessment of the proposed debt revamp.

“Sri Lankan bonds have under-performed other defaulted bonds, probably due to uncertainty about the timing of the bond exchange and political uncertainty about the upcoming elections,” said Carlos de Sousa, an emerging market debt portfolio manager at Vontobel Asset Management.

A gauge of Sri Lanka’s dollar bonds has dropped 1.6% this month, according to data compiled by Bloomberg. So far this year, however, the sovereign’s debt has returned 9.7%, outperforming the flagship Bloomberg Emerging Markets Hard Currency Aggregate Index, which is up 6.2%.

‘Continued Discussions’

Sri Lanka is in “continued discussions on the debt restructuring process,” Junior Finance Minister Shehan Semasinghe said in a message to Bloomberg News. The government has received an initial assessment from its Official Creditor Committee on the comparability of treatment in relation to the deal signed with bondholders in July and is currently awaiting further details.

“Once these have been received, it will be possible to engage further with bondholders on the basis of the information provided by these assessments and conclude the process,” he said, without specifying any time period for the final agreement.

The creditor group from the July agreement declined to comment.

The Asian island nation of 22 million will vote in a presidential election on Sept. 21 as incumbent Ranil Wickremesinghe seeks a mandate for his fiscal reforms as Sri Lanka seeks to shore up its economy after a default in 2022. The IMF is vetting the restructuring deal to ensure it fits into the debt parameters of its $3 billion loan to the country.

There is much unclarity about the debt deal amid concern over whether it treats all creditors fairly, especially as bilateral lenders are often reluctant to make their borrowing details public. The deal with private bondholders envisaged a 28% nominal reduction on the bonds’ principal, and the issuance of the so-called macro-linked bonds, whose payouts are linked to economic growth.

Barclays Plc analyst Avanti Save said there’s little time to prepare the debt deal before next month’s ballot, although she doesn’t rule out that an agreement could still be reached ahead of the vote.

“Bonds are down as clear either the IMF or the official creditors don’t agree with the deal,” said Thys Louw, a portfolio manager at Ninety One UK Ltd. “I think the deal doesn’t get done until after the election.”