The government of Sri Lanka has announced that it held restricted discussions over the past three weeks (the “Restricted Period”) with nine members of the steering committee who agreed to take part in the restricted discussions (the “Steering Committee”) of the Ad Hoc Group of Bondholders (the “Group”, and together with Sri Lanka, the “Parties”) of its International Sovereign Bonds (“ISBs”). Sri Lanka was joined by its legal and financial advisors, Clifford Chance and Lazard, respectively, and the restricted members of the Steering Committee were joined by the Group’s legal and financial advisors, White & Case and Rothschild & Co, respectively. The Steering Committee as a whole comprises ten of the largest members of the Group, with the Group controlling approximately 50% of the aggregate outstanding amount of ISBs. Despite constructive discussions, the Parties did not come to an agreement on restructuring terms. The Steering Committee did not agree to an extension of the restricted discussions upon expiration of the current Restricted Period.

During the Restricted Period, Sri Lanka, the Steering Committee and its advisors met during a two-day working session in London on 27 and 28 March 2024 (the “Meetings”) to discuss the Group’s latest debt treatment proposal, sent to Sri Lanka’s advisors on 11 March 2024 (the “Group’s March Proposal”). Prior to the meetings, on 25 March 2024, Sri Lanka had also sent, through its advisors, its own debt treatment proposal to the Group’s advisors (“Sri Lanka’s Proposal”) which was rejected by the Steering Committee. Both the Group’s March Proposal and Sri Lanka’s Proposal are attached in the Annex hereto.

Prior to the Meetings, staff at the International Monetary Fund (the “IMF”) provided their preliminary and informal assessment of both Parties’ proposals’ consistency with Sri Lanka’s IMF-supported program (the “IMF-Supported Program”) parameters and debt sustainability objectives. The IMF staff assessment included an analysis of the sum total of restructuring proposals (for official and private creditors) based on agreed deals with certain creditors and the Sri Lankan authorities’ restructuring scenario for other creditors. On that basis, the IMF staff concluded that the debt treatment scenario included in Sri Lanka’s Proposal was consistent with the IMF-Supported Program debt sustainability targets, while the scenario included in the Group’s March Proposal was not. IMF staff noted that these were preliminary assessments and the IMF staff would provide final assessments only after the Parties had reached a tentative agreement in principle.

During the Meetings, it was agreed that the primary basis for the discussions would be the Group’s March Proposal. Sri Lanka articulated the main reservations it had in relation to the Group’s proposed Macro-Linked Bond (“MLB”) – while members of the Steering Committee articulated the reasons why they believed the terms of their MLB proposal were fair and reasonable.

The Steering Committee also suggested the possible introduction of a Governance Linked Bond, which Sri Lanka said it would consider subject to being provided with more details of this proposal. Such details on the possible structure of a Governance Linked Bond were subsequently shared with Sri Lanka’s advisors on 3 April 2024.

The discussions narrowed down to four features of the MLB:

1. The baseline parameters of the instruments proposed by the Group were calibrated by reference to the Group’s “alternative baseline”, rather than Sri Lanka’s IMF-Supported Program baseline.

2. The balance of risks between Sri Lanka and holders of its ISBs – While the Group had already updated its original MLB structure to include a scenario where Sri Lanka might underperform IMF-Supported Program GDP projections, Sri Lanka invited the Group to consider a structure that would provide greater protections to Sri Lanka in such a scenario.

3. The test for triggering upward/downward adjustments in the MLB.

4. The share of additional value in an upward adjustment scenario – Sri Lanka invited the Group to consider lower bondholder allocation in the scenario in which the country outperformed IMF-Supported Program GDP projections and satisfied the upward adjustment test in the MLB.

Over the course of the Meetings, the Parties came closer to a meeting of minds on Items 1 and 2, with the Steering Committee willing to agree to Sri Lanka’s request for amendments in relation to these two key structural aspects, subject to Sri Lanka (i) agreeing to a consent fee (with the Steering Committee proposing a fee of 1.8% of the outstanding principal amount of the ISBs) with a view to offsetting the Group’s perceived reduction of the market value of their proposal as result of such amendments and (ii) agreeing with the Group’s proposal on Items 3 and 4.

Following the Meetings, on 3 April 2024, the Group shared an updated version of its debt treatment proposal (the “Group’s April Proposal”), which addressed Items 1 and 2 in the manner described above. The Group’s April Proposal is also attached in the Annex hereto. The Group’s April Proposal is yet to be assessed by the IMF staff.

While recognising the efforts made by the Group in accommodating some of its key observations, Sri Lanka reiterated its reservations regarding the structure of the MLB trigger test and the cashflows associated with the baseline and upside scenarios (Items 3 and 4).

Sri Lanka would like to thank the Steering Committee, the Group and their advisors for their constructive stance, and looks forward to continued engagement in good faith as soon as feasible, with a view to reaching common ground in the next few weeks, ahead of the second review of the IMF-Supported Program being considered by the IMF Executive Board