Sri Lanka | Some value remains despite recent bond rally

Despite the early-2021 rally reducing the previously glaring undervaluation of Sri Lankan bonds, they remain below fair value based on our detailed assessment of default and non-default scenarios. A non-default scenario remains feasible. Procrastination has taken hold, and it may require an intensification of funding pressures to push Sri Lanka away from China and towards the IMF. At that point, a restructuring is possible but not inevitable; clear fiscal measures could limit or avoid bondholder pain.

What you will learn from this report:

• Maturities from 2024 to 2030 are priced in the 61 to 64 range and all offer good value as they suffer less under a default scenario. Recovery values remain within 15% of current prices; yet NPVs under a non-default offer greater upside.
• Sri Lanka’s bond of greater than 2-year maturity as being undervalued by an average of 9%, with the 24s offering the best risk-reward.
• Sri Lanka’s FX reserves are low, but not yet signalling distress.