The immediate risk of SL’s debt adjustment event has eased: Barclays Investment Bank

In a report released by Barclays Investment Bank’s Credit Research platform titled “Sri Lanka: Making Ends Ends”, it was stated that although Sri Lanka’s foreign exchange reserves remain low (USD 4 billion at end-May 2021), the immediate risk of a debt – the adjustment event has diminished.

“Sri Lanka has secured a number of liquidity and loan lines from central banks and foreign agencies, which have eased funding pressures through short-term access to foreign currency,” the report explains.

Commenting on the effectiveness of the initial SRILAN bonds, in particular the 6.25% 2021 and 5.75% 2022 bonds, Barclays says they were the main beneficiaries of the flow of positive news regarding additional liquidity lines and guaranteed loans. , which they believe reduced the risk of a debt adjustment event.

“Bond prices reflect this: SRILAN 6.25% ’21 and SRILAN 5.75% ’22 are listed at 97.25-98.50 and 92-25-94.25, respectively. In comparison, the 5.875% 2022 and 5.75% 2023 SRILANs, which are listed at 85.0-86.5 and 75.25-76.75, while the rest of the curve (from 2025) is trading around the handle 63-69. We are thinking of the relatively low prices of the 5.875% 2022 and 5.75% 2023 SRILANs, which we consider to be short-term bonds, ”the report pointed out.

However, even though the lines of finance secured in recent months have reduced the risk of an impending debt adjustment, the report calls into question the sustainability of debt indicators, which will depend on Sri Lanka’s ability to boost debt. economic activity over the next 6 to 12 months above pandemic levels.

“Our medium-term concerns about the sovereign remain given his difficult external and budgetary position. Recent liquidity lines only offer a stopgap, which is why we are maintaining an underweight position. In this regard, we believe that a return of tourism will be essential to support external flows and economic activity, ”suggests the report.

Additionally, Barclays Investment Bank said it recommends purchasing SRILAN 5.875% 2022 and 5.75% 2023, which are listed at 85.0-86.5 and 75.25-76.75, respectively, at following recent declines.

The report speculates that the market was “scared” by the news that Ceylon Petroleum Corporation (CPC) had $ 2 billion in loans from local banks that needed to be refinanced. However, he said he does not view CPC’s debt burden as news as the risks with such large contingent liabilities, including those of the Ceylon Electricity Board (CEB), have been known for some time. time.

“In early May, the CPC already reported a foreign exchange loss of LKR 21.8 billion. In our opinion, the recent weakness in SRILAN bonds was triggered by a feeling of risk aversion after the June FOMC meeting as well. that some return on investment given the outperformance of the Sri Lankan complex in the second quarter after the confirmation of the PBoC swap line, ”says the report.

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