Fitch Ratings has downgraded Sri Lanka's Long-Term Local-Currency (LTLC) Issuer Default Rating (IDR) to 'C' from 'CC'. The issue ratings on local-currency bonds have also been downgraded to 'C' from 'CC'. The Long-Term Foreign-Currency (LTFC) IDR has been affirmed at 'RD' (Restricted Default) and the Country Ceiling at 'B-'. Fitch typically does not assign Outlooks to ratings of 'CCC+' or below.
The downgrade of Sri Lanka's LTLC IDR reflects Fitch's view that a sovereign local-currency debt restructuring process has begun, as parliament approved the government's domestic debt restructuring plan on 1 July. On 4 July, the authorities launched a formal exchange offer to bondholders for those bonds that are eligible for the restructuring.
"In Fitch's view, the proposed DDO will qualify as a distressed debt exchange (DDE) under our criteria, as it entails a material reduction in terms and is needed to avoid a traditional payment default," the rating agency said.
"We will downgrade the LTLC IDR to 'RD' upon closing of the exchange offer and following confirmation that the exchange will be executed. The government plans to complete the exchange within July."
