US backs SL’s request for stay proceedings extension in case filed by HRB

By Ashwin Hemmathagama in New York

The United States Government has endorsed Sri Lanka’s request for an additional five-month extension of proceedings.

Applauding Sri Lanka’s efforts in its debt restructuring program and the strides made, the US views an extended stay as a reasonable measure aligned with US policy.

In a letter addressed to US District Judge Denise L. Cote, the Department of Justice affirmed Sri Lanka’s strategic importance as a key partner in the Indo-Pacific region where the US government wholeheartedly backs Sri Lanka’s endeavours toward economic recovery and its ongoing advancements within the IMF program. This support also extends to Sri Lanka’s economic and governmental reforms initiatives, aimed at fostering sustainable economic growth and development.

Highlighting the adverse effects of failed debt restructuring, the Department of Justice said: “As the Court previously held, a breakdown in restructuring negotiations could threaten Sri Lanka’s progress towards International Monetary Fund (IMF) targets, its economic recovery, and the well-being of its citizenry. By contrast, a stay significantly benefits the interest of Sri Lanka’s bilateral creditors and private commercial creditors who are actively involved in the debt restructuring negotiations. It also supports the public interest. Those same grounds for granting the first stay apply to Sri Lanka’s motion for a further stay.”

For decades, the US has been significantly interested in the orderly and cooperative resolution of sovereign debt defaults, which is crucial to the stability and future growth of the world and the US economy. The longstanding policy of the United States dictates that in cases where a sovereign entity is unable to fulfill its external financial commitments, an orderly and mutually agreed-upon restructuring of sovereign debt, coupled with necessary macroeconomic adjustments, is deemed the most suitable course of action.

“In October, the United States assessed that a stay would facilitate an orderly and consensual sovereign debt restructuring process, as the expectation is that the Official Creditors Committee (OCC) and other bilateral creditors will reach consensus on debt treatment terms—including a term committing Sri Lanka to seek comparable treatment from its commercial creditors and other official bilateral creditors—by the end of the year, with the process for implementing those terms via bilateral agreements between the respective creditor countries and Sri Lanka Underway. It explained that a stay would also facilitate negotiations with private creditors, an estimated majority of which, through the Ad Hoc Bondholders Group, have conditioned their participation on the application of comparable treatment. Since the Statement of Interest was filed and the Court granted the stay of proceedings, Sri Lanka has made demonstrable progress on its debt restructuring. Sri Lanka has been proceeding in negotiations with official creditors in good faith.  While the United States is not a party to negotiations with private creditors, its understanding is that Sri Lanka has been proceeding in those negotiations in good faith as well,” confirmed the Department of Justice.

On 29 November 2023, the OCC announced that it had reached an ‘agreement in principle’ with Sri Lanka regarding the primary parameters of a debt restructuring aligned with those outlined in the Extended Fund Facility (EFF) arrangement between Sri Lanka and the IMF. This agreement followed extensive collaboration between the OCC, Sri Lankan authorities, the IMF, the World Bank, China, and Sri Lanka’s private creditors. Currently, the OCC and Sri Lanka are in the process of formalising the agreement in principle into a signed Memorandum of Understanding. Concurrently, the IMF has been closely collaborating with Sri Lanka as part of its IMF program and initiatives aimed at restoring debt sustainability.

“While Sri Lanka’s negotiations with its private creditors are complex, substantial prospects for near-term success remain, and the next steps are critical. Absent a further stay, a judgment against Sri Lanka, entered before restructuring talks further advance, could encourage other private creditors to try to ‘jump the queue’ like Hamilton Bank and seek repayment separately on the terms achieved by Hamilton Bank through litigation rather than as part of an orderly debt restructuring process.

Such a breakdown could jeopardise the commendable progress that Sri Lanka has made in response to its economic crisis, working with the IMF, the OCC, other official bilateral creditors, and private creditors,” predicts the Department of Justice.

In sovereign debt restructuring scenarios involving multiple stakeholders, it is customary for the sovereign debtor to finalise terms with its private creditors after reaching agreements with entities like the OCC. This sequence is due to the sovereign debtor’s commitment to the ‘comparability of treatment’ principle, which entails seeking comparable debt treatment from all commercial and official bilateral creditors. The finalisation and signing of the MOU with the OCC will aid Sri Lanka in advancing negotiations with its private creditors, ensuring consistency in the application of comparable treatment. Notably, a significant portion of private creditors, represented by the Ad Hoc Bondholders Group, have already stipulated their participation contingent upon receiving comparable treatment, as previously mentioned in the SOI.

Sri Lanka was sued in the United States by a bondholder after the government defaulted on its debt for the first time in history while struggling to stop an economic meltdown where HRB, owns over US $ 250 million in principal amount of US $ 1 billion worth of Sri Lanka’s 5.875% International Sovereign Bonds (ISBs) issued in 2012, filed the lawsuit in June last year in a New York federal court seeking full payment of principal and interest. The Bonds matured on 25 July 2022. Hamilton alleged that due to Sri Lanka’s default, it is owed US $ 250.19 million in principle and US $ 7.349 million in accrued interest (before accounting for pre- and post-judgment interest). Sri Lanka in mid-April announced a moratorium on foreign debt repayments, including the Bonds, and since then has made no payments on the Bonds. The government of Sri Lanka filed a motion in September 2022 to dismiss because the plaintiff lacks contractual standing.