Fitch Ratings has downgraded Sri Lanka’s Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to ‘C’ from ‘CC’. The issue ratings on local-currency bonds have also been downgraded to ‘C’ from ‘CC’.

The Long-Term Foreign-Currency (LTFC) IDR has been affirmed at ‘RD’ (Restricted Default) and the Country Ceiling at ‘B-’.

The downgrade of Sri Lanka’s LTLC IDR reflects Fitch’s view that a sovereign local-currency debt restructuring process has begun, as parliament approved the government’s domestic debt restructuring plan on 1 July.

On 4 July, the authorities launched a formal exchange offer to bondholders for those bonds that are eligible for the restructuring.

The debt restructuring announcement outlines a domestic debt optimisation (DDO) strategy, which includes treatment of Sri Lanka’s domestic debt as well as domestically issued foreign-currency debt.

The key elements of the DDO includ: conversion of CBSL’s T-bills and provisional advances to the government into treasury bonds (T-bonds); exchange of superannuation funds’ T-bonds into longer maturity T-bonds; exchange of outstanding Sri Lanka development bonds (SLDBs), which are US-dollar denominated but governed by local law, into new US dollar or Sri Lankan rupee instruments; and, restructuring of local-law foreign-currency denominated bank loans of the government.

The debt restructuring excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, but bank holdings of SLDBs will be affected.

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