Sri Lanka has been sued in the United States by a bondholder after the South Asian nation defaulted on debt for the first time in history while struggling to stop an economic meltdown.
Hamilton Reserve Bank Ltd., which holds more than $250 million of Sri Lankan 5.875% international sovereign bonds due July 25, filed suit Tuesday in federal court in New York seeking full payment of principal and interests. The bank’s stake represents more than 25% of the total amount of the bonds, which, according to the trust deed, would probably allow it to block an unwanted modification of the bonds.
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Sri Lanka, an island nation off the southern tip of India, fell into default in May after a 30-day grace period expired for missed interest payments on two of its sovereign bonds . It was the country’s first sovereign debt default since its independence from Britain in 1948.
Hamilton Reserve, based in Saint Kitts and Nevis, said in the lawsuit the default was “orchestrated by officials at the highest levels of government”, including the ruling Rajapaksa family, and accused Sri Lanka of exclude bonds held by national banks and other interested parties from an announced debt restructuring.
“As a result, these privileged Sri Lankan parties should receive the principal and interest in full, while the bonds – which are also widely held by US pension systems, including Fidelity Investments, BlackRock, T. Rowe Price, Lord Abbett, JPMorgan, PIMCO, Neuberger Berman and other US investors – remain in default and unpaid indefinitely, causing American retirees enormous suffering from potentially massive losses of up to 80% of their original investment value.” , Hamilton Reserve lawyers said in their complaint.
Sri Lankan Prime Minister Ranil Wickremesinghe told parliament on Wednesday that the financial health of banks in Sri Lanka was “one of the biggest problems” facing the country. He did not specify.
A group of Sri Lanka’s biggest creditors, including Pacific Investment Management Co., T. Rowe Price Group Inc. and BlackRock Inc., have been put together and restructuring talks are expected to begin soon, Bloomberg reported, citing people familiar with the arrangement who requested anonymity ahead of an official announcement.
The island nation is grappling with a worsening humanitarian crisis after running out of dollars to buy imported food and fuel, pushing inflation to 40% and forcing default. Sri Lanka needs $5 billion to ensure “everyday life is not disrupted” and another $1 billion to strengthen the rupee, Wickremesinghe told parliament earlier this month.
Sri Lanka has hired Lazard Ltd. and Clifford Chance LLP in May to serve as financial and legal advisers on debt restructuring as the country seeks a bailout from the International Monetary Fund.
The country would seek advice from advisers on how to proceed with the lawsuit filed in the United States, people familiar with the debt restructuring talks said. People did not want to be identified because the discussions were private.
Sri Lanka began talks with the IMF on Monday, working towards a deal that could give creditors enough comfort to lend new funds to the bankrupt nation seeking $6 billion in the coming months.
The case is Hamilton Reserve v. Sri Lanka, 22-cv-5199, US District Court, Southern District of New York (Manhattan).