• Defaults on $ 175 m bond amidst failure to complete consent solicitation

SriLankan Airlines has in theory defaulted on its $ 175 million international bond following its failure to complete the creditor consent solicitation process to obtain approval to defer coupon payments by 12 months before 25 January.

SriLankan was required to make the coupon payment for its $ 175 million Government-guaranteed bond due in 2024 by 25 December 2022. However, in early December 2022 it commenced a consent solicitation process to obtain bondholder approval for a deferment of the coupon payments and a waiver of ongoing events of default for a 12-month period. 

It was reported that SriLankan Airlines had initially hoped to complete the consent solicitation process by 16 January before the end of the 30-day grace period to make its coupon payments expiring on 25 January.

However, speaking to The Sunday Morning Business, a senior official from the Ministry of Finance confirmed that SriLankan Airlines had to date failed to complete its consent solicitation process and that negotiations were still ongoing. He further revealed that no coupon payment had yet been paid to the bondholders.

“SriLankan Airlines has not paid the coupon payment yet and it is also yet to obtain a final decision (from the creditor consultation process). This is how things stand as of now. I believe it has not made the coupon payment because negotiations are still ongoing,” he explained.

In its announcement on 22 December 2022, SriLankan Airlines sought the consent of its bondholders over three proposals. Firstly, SriLankan asked for approval to defer two coupon payments due on 25 December 2022 and 25 June 2023 to be paid in full on 25 December 2023.

Secondly, investors were requested to approve a temporary 12-month waiver of events of default under a second proposal. Thirdly, bondholders were requested to allow a revision in the bond agreement to allow investors holding not less than 50% of the total principal bond amount to instruct the bond trustee to rescind and annul any notice given to the issuer to accelerate the bonds following an event of default.

All attempts by The Sunday Morning Business to contact SriLankan Airlines Chairman Ashok Pathirage and Minister of Ports, Shipping, and Aviation Nimal Siripala de Silva regarding the creditor consultation process proved futile.

While in theory SriLankan has clearly defaulted on its $ 175 million Government-guaranteed bond due in 2024 (ISIN iXS2010609662) with an annual coupon payment of 7% payable semi-annually, it is still possible that the airline may be able to avoid defaulting officially if the creditor consultation process is successful and the bondholders agree to waive the event of default for a 12-month period.

Speaking to The Sunday Morning Business previously, Manjuka Fernandopulle, an Attorney-at-Law specialising in sovereign debt restructuring and complex capital market transactions, stated that the decision of the airline bondholders with regard to the proposals forwarded by SriLankan Airlines would be based on whether they believed that SriLankan would be able to pay the amount due to them by December 2023 following the deferral of coupon payments or if they believed they would be better served by joining the creditor group consisting of the Government’s ISB holders in order to restructure the airline bonds together with the other bonds of the Sri Lankan Government in the ongoing debt restructuring process. 

“The question before the airline’s bondholders is whether they are better off varying the terms of the bond and deferring the coupon payments or whether they are better off joining the creditor group of the Government’s ISB holders. Their decision will be based on the assurances provided by SriLankan Airlines regarding its ability to make the payments following the deferral. If they feel that they will get nothing from SriLankan even after the deferral, they will consider entering the creditor group consisting of the Government’s ISB holders and receive a restructured bond issued by the Government of Sri Lanka,” he explained.