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Banks face NPV loss under ISB deal: Acuity

Banks face NPV loss under ISB deal: Acuity

23 Sep 2024 | By Imesh Ranasinghe


  • 1: Estimates 36-38% NPV loss with potential for write-back
  • 2: Local option offers lower haircut but higher coupon rates

Acuity Partners expects the net present value (NPV) loss for banks under the local option of the International Sovereign Bond (ISB) deal to be between 36-38% while having write-off possibility.

Accordingly, listed commercial banks have made provisions of up to 50% for their ISB holdings and Acuity Partners expects that the NPV loss under the local option may be 36-38% (Sum of impact from new US dollar bond and floating rate rupee bond).

“Therefore, we expect that LCB’s in our coverage universe will have a possibility to write-back excess provisions of 12-14% of their ISB exposures,” they said.

The agreement includes a new local option offered to both foreign and local ISB holders, subject to a cap of 25% of the aggregate outstanding amount of ISB’s, with priority given to local holders of ISB’s.

The local option envisages a lower 10% haircut on 70% of the nominal outstanding value of such ISBs, which will be swapped for dollar bonds amortising from 2029 to 2038.

However, the coupon rates of 1.5% to 3.5% on the new dollar bonds under the local option will be substantially lower than the higher rates offered to bondholders under the alternative option, which negates any NPV gain from the lower haircut on local options.

Moreover, Acuity Partners said that Sri Lanka will be liable to pay a consent fee of $ 225 million upfront and capital repayment on the PDI bond of $ 117 million in 2024 depending on the date of signing the agreement with bondholders.

“We expect that given the current level of reserves, expected multilateral/bi-lateral funding and current account surpluses in the balance of payments during the remainder of the year, such debt service payments will not exert undue pressure on the exchange rate,” It said.

Further, Acuity Partners expects that the local option would help to achieve GFN targets by further pushing back maturities to 2036 through 2043 and by minimising dollar rollover risk after 2029.




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