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ECONOMYNEXT – Some of Sri Lanka’s bondholders who were willing to negotiate a deal before a judgement was delivered in a case filed by holdout investor Hamilton Reserve, are frustrated at what is seen as no progress in discussions, sources familiar with their thinking said.

While Hamilton Reserve has gone to court claiming to represent a 250 million dollar or 25 percent share in a billion-dollar bond with a so-called ‘single series’ collective action clause, a large majority of bondholders who have other bonds, have formed a committee to negotiate with Sri Lanka.

Western governments including the US and France have asked that the court action be stayed until negotiations with other bondholders conclude, but prospects of a deal being concluded by the time the first deadline given by the court has now dimmed.

It is not clear yet whether a second extension could be obtained from court.

Lost Opportunity?

If Hamilton Reserve gets a court order in their favour, before an in-principle deal to re-structure sovereign bonds is reached, other investors who were willing to negotiate and take a haircut, would not be happy, the sources said.

If Sri Lanka concludes a deal with bondholders who are willing to negotiate, they could also support Sri Lanka to use other legal options including ‘exit consents‘ procedures with a super majority of 66.66 percent to weaken holdout bonds, the sources said.

For such a move, Sri Lankan banks who are also substantial owners of the bonds in question would have to get participate.

Sri Lanka has already rejected a proposal by the ad hoc committee formed by private investors to exchange a bond which will be tied to developments in gross domestic product, a so-called state contingent bond, which had substantially high coupons in the initial stages.

Related Sri Lanka bondholders propose up to 9.5-pct dollar-GDP linked downside bonds

After that, there had been no negotiations to arrive at a compromise or break the impasse, sources said.

Amid these developments, with the clock running, frustration is mounting at what is perceived to be a lack of interest on the part of Sri Lanka.

Tough Calls

A senior Sri Lankan official said there was definitely interest on the part of Sri Lanka to conclude a deal. Sri Lanka’s government and officials are fighting multiple battles.

Sri Lankan has publicly said there were exchanges were in progress between the respective advisors, though private investors have a different view.

As far as private investors are concerned, the last proper ‘working session’ took place in Morocco.

Amid these developments tough calls may be required in arriving at an an agreement deal.

Private investors had proposed the GDP linked security due to their belief that IMF growth projections were overly pessimistic which requires them to take a bigger loss due to a resultant smaller gross financing need number.

Unless Sri Lanka is willing to give some kind of state contingent instrument, or the IMF revises upwards its macro projections, the prospects of wrapping up a deal quickly is not very bright, according to the sources.

Following the local reaction to the approach taken to re-structure domestic bonds, which however is having the intended results in falling interest rates, giving upside bonds to foreign investors would also to be problematic.

There is also a view among some bondholders that the in-principle deal that was agreed with bilateral creditors and China Exim Bank, broad details of which had now been shared, is not comparable with what was asked from them, the sources said.

Bondholders had formally complained late last year that they were not initially informed of the details of the bilateral deal.

Related Sri Lanka bondholders seek official creditor deal terms, say slow progress on talks

If the bondholders had told the IMF before the review that Sri Lanka was not negotiating in ‘good faith’, the completion of the first review would have been in jeopardy, sources said.

The IMF had said that they expected Sri Lanka to have an in-principle deal by the next review with the private creditors without directly saying whether the review could pass without a deal.

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