Courtesy BNN Bloomberg

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Moody’s Ratings is reviewing Sri Lanka’s sovereign credit rating for an upgrade, as the nation is set to complete its debt restructuring of its dollar bonds.

The rating agency assigned the new dollar notes Sri Lanka is offering to swap for old debt a (P) Caa1 rating, according to a statement. The dollar bond maturing in 2030 rose to the highest since June 2021 on Thursday after the credit update. 

The debt swap reduces the default risk on new and future issuances,” Moody’s analysts Anushka Shah and Gene Fang said. The government’s debt restructuring and reforms are reducing external vulnerability and liquidity risk, while raising prospects for long-term fiscal and debt sustainability, they added.

The agency is the first among major peers to assign a credit rating to the notes, whose payouts are linked to economic growth. The governance linked-bond, the step-up and past-due interest (PDI) bonds are also rated as Caa1, meaning that they carry very high credit risk.

The ‘P’ assignation means the rating is provisional, as the debt restructuring is still under way. The tender offer expires Dec. 12, with the results to be announced four days later. 

Read: Sri Lanka Kicks Off $12.6 Billion Distressed Debt Exchange

The review comes on the heels of Sri Lanka launching a bond exchange offer to complete its dollar-denominated debt restructuring. The country’s new leader Anura Kumara Dissanayake has reiterated support to the International Monetary Fund program objectives, ensuring policy continuity after the closely watched elections. 

If the government delivers on IMF targets and raises more revenue, brings debt under control and manages the macro prudently,” an upgrade is possible, said Philip Fielding, co-head of emerging market debt at MacKay Shields. 

The country’s bonds, which have returned nearly 30% to investors this year, rallied on Thursday, posting the biggest gains among emerging-market peers. The nation’s 2025 dollar note rose 1 cent on the dollar, for the best performance on the Bloomberg EM Sovereign Total Return Index. Five other securities figured in the top 10.

–With assistance from Srinivasan Sivabalan.

(Updates with analyst comment in seventh paragraph)