Sri Lanka’s Credit Rating Upgrade

(Reuters) – Credit ratings agency Fitch upgraded Sri Lanka’s long-term foreign-currency default rating to ‘CCC+’ from ‘restricted default’ (RD) after creditors approved a $12.55 billion debt overhaul earlier this week.

The island nation’s bondholders overwhelmingly endorsed the government’s proposal to restructure international bonds, a crucial step for recovery from its worst financial crisis in decades.

Fitch noted that “Sri Lanka has normalized relations with a majority of creditors” and also upgraded the country’s local-currency IDR to ‘CCC+’ from ‘CCC-‘.

According to the government, the new restructuring package is expected to save Sri Lanka $9.5 billion in debt service payments during its four-year IMF program. The country secured a $2.9 billion four-year bailout from the International Monetary Fund (IMF) in March last year.

Sri Lanka defaulted on its foreign debt for the first time in May 2022 due to its high debt burden and dwindling foreign exchange reserves, which led to widespread shortages of food, fuel, and medicines.

Under the debt overhaul plan, defaulted bonds will be swapped for new fixed-income instruments, allowing a 75 basis-point reduction in interest rates provided certain governance targets are met.

After finalizing the bond exchange, Sri Lanka will become the fourth country to complete a bond restructuring this year, joining Ghana, Ukraine, and Zambia.