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Sri Lanka sued by bondholder

Bank with $250M in bonds seeks owed principal, interest by Chris Dolmetsch Bloomberg News (WPNS) | June 23, 2022 at 1:48 a.m.
Women wait near an empty fuel station hoping to buy kerosene oil for cooking in Colombo, Sri Lanka, in May. Sri Lankans for months have been forced to stand in long lines to buy scarce essentials, with many returning home empty-handed in a drawn-out failure of the island nation’s economy. (AP/Eranga Jayawardena)

Sri Lanka was sued in the United States by a bondholder after the South Asian nation defaulted on its debt for the first time in history while struggling to stop an economic meltdown.

Hamilton Reserve Bank Ltd., which holds more than $250 million of Sri Lanka's 5.875% International Sovereign Bonds due July 25, filed the suit Tuesday in a New York federal court seeking full payment of principal and interest.

Sri Lanka, an island nation off the southern tip of India, fell into default in May after the expiry of a 30-day grace period for missed interest payments on two of its sovereign bonds. It was the first sovereign debt default by the country since it gained independence from Britain in 1948.

Sri Lanka's debt-laden economy failed after months of shortages of food, fuel and electricity, the prime minister told lawmakers Wednesday in comments that underscored the country's dire situation as it seeks help from international lenders.

Prime Minister Ranil Wickremesinghe told Parliament the South Asian nation faces "a far more serious situation" than the shortages alone, and he warned of "a possible fall to rock bottom."

"Our economy has completely collapsed," he said.

Hamilton Reserve, based in St. Kitts & Nevis, said in the lawsuit that the default is being "orchestrated by officials at the highest levels of government," including the ruling Rajapaksa family, and accused Sri Lanka of excluding bonds held by domestic banks and other interested parties from an announced debt restructuring.

"As a result, these favored Sri Lankan parties stand to be paid principal and interest in full, while the Bonds -- which are also broadly held by US retirement systems including Fidelity Investments, BlackRock, T. Rowe Price, Lord Abbett, JPMorgan, PIMCO, Neuberger Berman and other U.S. investors -- remain indefinitely in default and unpaid, causing American retirees tremendous suffering from potentially massive losses of up to 80% of their original investment value," lawyers for Hamilton Reserve said in their complaint.

Prime Minister Wickremesinghe told parliament Wednesday the financial health of banks in Sri Lanka was "one of the biggest issues" the nation faced. He did not elaborate.

A group of Sri Lanka's largest creditors, including Pacific Investment Management Co., T. Rowe Price Group Inc. and BlackRock Inc., has been set up and restructuring talks are expected to start soon, Bloomberg reported, citing people familiar with the arrangement who requested anonymity ahead of a formal announcement.

The island nation is grappling with a worsening humanitarian crisis after it ran out of dollars to purchase imported food and fuel, pushing inflation to 40% and forcing the default. Sri Lanka needs $5 billion to ensure "daily lives are not disrupted," and a further $1 billion to strengthen the rupee, Wickremesinghe told parliament earlier this month.

Sri Lanka hired Lazard and Clifford Chance in May to serve as financial and legal advisers on debt restructuring as the country seeks a bailout from the International Monetary Fund.

The country would seek guidance from the advisors on how to proceed with the lawsuit filed in the U.S., people familiar with the debt restructuring talks said. The people did not want to be identified as the discussions were private.

Sri Lanka on Monday began talks with the IMF, working toward an agreement that could offer creditors enough comfort to lend fresh funds to the bankrupt nation that's seeking $6 billion in coming months.

So far, Sri Lanka has been muddling through, mainly supported by $4 billion in credit lines from neighboring India. But Wickremesinghe said India would not be able to keep Sri Lanka afloat for long.

It also has received pledges of $300 million to $600 million from the World Bank to buy medicine and other essential items.

Sri Lanka has already announced that it is suspending repayment of $7 billion in foreign debt due this year, pending the outcome of negotiations with the IMF on the rescue package. It must pay $5 billion on average annually until 2026.

Wickremesinghe said IMF assistance seems to be the country's only option now. Officials from the agency are visiting Sri Lanka to discuss the idea. A staff-level agreement is likely to be reached by the end of July.

"We have concluded the initial discussions, and we have exchanged ideas on various sectors," Wickremesighe said.

Representatives of financial and legal advisers to the government on debt restructuring are also visiting the island, and a team from the U.S. Treasury will arrive next week, he said.

Information for this article was contributed by Krishan Francis of The Associated Press.

Print Headline: Sri Lanka sued by bondholder

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