Sri Lanka: restructuring with biodiversity links?

5 minute read

Sri Lankan government bonds (15bn of US dollar-denominated bonds outstanding) are currently trading at distressed levels implying a market expectation of a default and/or restructuring in the near term. Combining the fact that Sri Lanka has explored various ways to tap into green funding in 2021, the country’s climate change vulnerability as well as the high demand for positive impact assets in the international investor community, it seems natural to involve some sustainability criteria in a potential restructuring of the USD bonds.

Sri Lanka exhibits exceptional levels of terrestrial and marine biodiversity whilst having an economy highly dependent on nature and its services (for sectors such as fisheries, agriculture and tourism). As Sri Lanka is moving towards the end of its 2016-2022 National Biodiversity Strategic Action Plan, investors could have an important role in terms of supporting renew and strengthened plans.

Various new initiatives during COP26 discussed different ways to provide credit enhancement for EM assets: we opine that this is a situation where the rubber should hit the road. Ideally, we would see a credit enhanced structure allowing investment grade investors to participate in an investment meeting both their rating/size criteria as well as having robust sustainability links. We suggest focusing on biodiversity factors such stopping deforestation, general marine protection and specific whale habitat protection measures.