By YUKTHI
Sri Lanka is currently negotiating the restructuring of its foreign debt with its external creditors. The country defaulted on its external debt in 2022 and stopped payments under the original debt agreements. The debt restructuring agreements will set out when, how much, and for how long Sri Lanka will pay her creditors. The terms of these contracts will be in effect when external market access is restored presumably after 2027.[2] The level of debt repayment can lead to another crisis, another default, and will affect Sri Lanka’s future generations. Sovereign bonds including restructured bonds are based on contract law, as no treaty or other multilateral legal framework governs it. Therefore, parties (creditors and debtor States) are in theory free to agree on the terms and conditions including which law will apply in the event of a dispute.[3]
On 19 September 2024, the Government of Sri Lanka announced reaching an agreement in principle with the Ad Hoc Group of Bondholders, the Local Consortium of Sri Lanka, and the China Development Bank on Debt Restructuring Terms.[4] An agreement in principle means there is still no legally binding or enforceable contract.
Based on the announcement, this ‘agreement in principle’ with the ‘Restricted Members’ of the Steering Committee of the Ad Hoc Group of Bondholders[5] includes a clause that allows creditors to decide not to be bound by New York Law – under which over fifty percent of total stock of international sovereign bonds are underwritten[6] – without needing much consensus even among all the creditors involved[7]. Further, there is no mention that the Sri Lankan Government will have the power to veto such a change of law by the creditors.
Concerns
- This ‘choice of law’ clause is an attempt to evade new laws that insist on fair and sustainable debt restructuring. Commentators have speculated that the proposed Sovereign Debt Stability Act in New York[8] is the reason creditors are attempting to avoid New York law. The proposed New York law prescribes fair restructuring to address the disadvantageous position of debtor nations in restructuring negotiations. The Bill faces resistance and is yet to be passed.
- Internationally, Sri Lanka will set a bad precedent by adopting such a disadvantageous clause. At a time when around seventy countries are in debt distress, it is essential to build solidarity and resist oppressive and extractive debt restructuring by creditors. So far, only Suriname has adopted a similar clause, however, they have retained the power to veto the use of the choice of law option.[9]
- Sri Lanka’s debt restructuring negotiations have long been held in secret. Public trust building and accountability require public communication and transparency on the Government’s positions and negotiating framework along with the negotiation process and draft agreements that Sri Lanka makes with its creditors. A democratic process should result in any finalized agreement being placed before Parliament before the country signs on to it.
[1] By Ermiza Tegal and Namashya Ratnayake, Attorneys at Law (5 October 2024). The authors thank Dr. Ahilan Kadirgamar and Ms. Yathursha Ulakentheran for their comments.
[2] The IMF Debt Sustainability Analysis is based on the assumption that external market access will only be restored in 2027. See, International Monetary Fund, ‘IMF Country Report No. 23/116’ (March 2023) at p. 55 available at https://www.imf.org/en/Publications/CR/Issues/2023/03/20/Sri-Lanka-Request-for-an-Extended-Arrangement-Under-the-Extended-Fund-Facility-Press-531191
[3] See generally, Philip Wood ‘Choice of Governing Law for Bonds’ (2020) 15 (1), Capital Markets Journal 3
[4] The full text of the announcement is available at https://www.londonstockexchange.com/news-article/70ZL/announcement-of-agreement-in-principle/16674142
[5] Refers to nine members of the Steering Committee of the Ad Hoc Group of Bondholders. The Steering Committee, the ten largest members of the Group, controls approximately 40% of the aggregate outstanding amount of the Bonds. The Ad Group consists of more than 30 institutional holders of the 11 outstanding series of international bonds and represents the interests of international investors in the restructuring of Sri Lanka’s debt. For more information on the Ad Hoc Group see, White & Case LLP, ‘Sri Lanka Bondholders Announce Formation of Group’ (PRSNewswire, 21 June 2022). Available at
[6] International Monetary Fund, The International Architecture for Resolving Sovereign Debt Involving Private-Sector Creditors – Recent Developments, Challenges, and Reform Options 22 n.27 (Sept. 23, 2020) available at https://www.imf.org/en/Publications/Policy-Papers/Issues/2020/09/30/The-International-Architecture-for-Resolving-Sovereign-Debt-Involving-Private-Sector-49796.
[7] The relevant text in the above announcement reads at paragraph 8, “A mechanism to change the governing law of the New York law governed new securities to English or Delaware law with the consent of a supermajority of bondholders if proposed by holders of 20% of any particular series of the new securities was also agreed.”
[8] The full text of the proposed law is available at: https://www.nysenate.gov/legislation/bills/2023/S5542/amendment/A
[9] See, Libby George, Rodrigo Campos, ‘Wall Street strikes back against New York’s sovereign debt bill’ (Reuters, 26 September 2024), available at https://www.reuters.com/markets/wall-street-strikes-back-against-new-yorks-sovereign-debt-bill-2024-09-26/
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