Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Due to last night’s pub quiz we weren’t able to jump on this immediately, but US district judge Denise Cote yesterday granted Sri Lanka’s request for a six-month halt on a creditor lawsuit against the country. Huzzah!
Hamilton Reserve Bank — an obscure, tiny St Kitt’s bank with, um, interesting ties — says it has accumulated a big chunk of one of Sri Lanka’s now-defaulted bonds, and had been suing it for immediate repayment.
Sri Lanka had asked for a stay on these legal proceedings to let it restructure its overall pile of debt in some peace and quiet, and had gotten heavyweight support from the UK, France and the US government.
It seems to have worked, with Judge Cote ruling that a stay wouldn’t really do any damage to HRB:
The Court recognizes that a stay will prejudice the plaintiff’s ability to obtain a prompt judgment. The requested stay, however, is not indefinite. Sri Lanka seeks a six-month stay of this litigation while it conducts sovereign debt restructuring negotiations with sovereign and commercial creditors. Moreover, if Hamilton prevails on its claim at some future date, any judgment will be subject to pre-judgment interest. Accordingly, the prejudice to the plaintiff is limited.
This is entirely true. More intriguingly, the judge also implicitly recognised that the public interest in an orderly restructuring trumped HRB’s legal rights for a summary judgment.
Basically, while Hamilton’s rights are unquestionable — it really is a jilted Sri Lankan creditor — the court is willing to slow-walk things for the sake of other creditors, Sri Lanka and the amorphous principle of orderly workouts.
FT Alphaville’s emphasis from the judge’s opinion below:
The private interests of and burden on the defendant are significant — a judgment for Hamilton would likely threaten the complex debt negotiations and, hence, the successful economic rehabilitation of Sri Lanka. Hamilton’s claim that any such prejudice is “wholly speculative and implausible” must be rejected. A judgment for Hamilton would provide an incentive to other bondholders to engage in line-jumping litigation and deter commercial creditors from participating in the restructuring negotiations. As France and the UK explain, a decision in favor of Hamilton would provide a “strong incentive” for holdout creditors to forgo participation in voluntary restructuring. Moreover, the IMF funding is contingent on “a sovereign debt restructuring that meets debt sustainability targets.” A breakdown in restructuring negotiations could threaten Sri Lanka’s progress towards these IMF targets, its economic recovery, and the well-being of its citizenry.
A stay also supports the interests of persons not parties to the civil litigation, including Sri Lanka’s official bilateral creditors and private commercial creditors. If judgment were entered for Hamilton, the plaintiff may assert that it has priority in recovery while the debt restructuring negotiations are ongoing. As described in the Paris Club Amicus Brief, “the implementation of comparability of treatment among creditors is of the utmost significance, as it serves as the bedrock for obtaining creditors’ consent to the debt restructuring.”
But there’s more!
To Alphaville’s eyes, the most interesting aspect of the decision is the bit in bold below:
In August 2021, Hamilton began to purchase the bonds at issue here. Hamilton asserts that it is the beneficial owner of over $240 million in principal amount of Sri Lanka’s international sovereign bonds that were due in July 2022 (the “Bonds”). The Bonds provide for interest payments of 5.875% per annum, paid semi-annually on January 25 and July 25 of each year, from January 25, 2013 through July 25, 2022. Following Sri Lanka’s moratorium on foreign debt repayments in the Spring of 2022, Sri Lanka failed to pay the principal and interest amount due to the plaintiff when those bonds matured on July 25, 2022. Hamilton alleges that, as a result of Sri Lanka’s default, it is owed $242,990,000 in principal and $7,137,831.25 in accrued interest (before accounting for pre- and post-judgment interest). Hamilton represents that it has not participated, and does not wish to participate, in Sri Lanka’s restructuring negotiations.
This indicates that Hamilton does NOT control enough of the bond in question to block the use of collective action clauses. Which could radically change things.
Previously, HRB had said that it held $250mn of the bond in question. The collection action clauses embedded in the bond stipulate that if a restructuring deal is struck by 75 per cent of holders it is binding on all of them, so $250mn would give HRB enough votes to block any deal it didn’t like. But $243mn is narrowly short.
The bank could get someone else to join it, or might be sitting on another sliver that gives it a blocking stake. Or maybe this is just wrong. But if this is true then Sri Lanka’s situation suddenly looks a LOT better.
