Lazard intensively evaluates State Banks asset quality
The Lazard Sovereign Advisory Group, which serves as a financial adviser to Sri Lanka’s debt restructuring programme, has undertaken an intense examination into the best way to approach State Banks for the local debt restructuring programme, a senior government official told Finance Today.
According to official sources, Lazard is currently undertaking an in-depth study to determine how participation in domestic debt restructuring programme will affect the overall quality of assets held by each State Bank.
“In addition to the ongoing banking sector asset quality evaluation by global accounting and auditing firms KPMG and EY, Lazard is also independently evaluating the financial health of each Bank in accordance with IMF recommendations. On the basis of this study, a definite decision will be made regarding the restructuring of each State Bank’s investments in Treasury Bonds,” an official stated.
Analysts believe that to comply with the terms of Sri Lanka’s public debt restructuring programme, private creditors who have invested in International Sovereign bonds or ISBs are required to take a capital reduction or haircut of at least 30–40 per cent.
Accordingly, the relevant private bond holders believe that the necessary sacrifices should be made at the same level locally in order to obtain their approval.
“The contribution made locally is essential for the success of the restructure of public debt”, the official said.
However, the view that has been held by all parties, including the IMF is that the process of restructuring domestic debt should be carried out in such a way that there is no risk to the local banking system, which is already experiencing a great deal of stress.
To ensure that the domestic banking system is not put at risk, Lazard will conduct an in-depth analysis of the debt restructuring process, and has already engaged in extensive dialogue with nearly all of the major investors in the domestic treasury bond market to ascertain their viewpoints.
According to officers, the sovereign debt restructuring team has proposed to extend the maturities of domestic bond investments by ten years or issue new bonds with an attractive interest rate to encourage the respective parties to agree to this local debt restructuring process.
Heads of State Banks recently convened with Lazard to discuss the state banking sector’s position in the domestic debt restructuring procedure.
However, they have expressed reluctance to participate in the voluntary process of restructuring Treasury Bonds.
On 30 March 2023, the Governor of the Central Bank and Treasury Secretary presented a report to creditors on the status of debt restructuring, which will be accomplished in two ways: to provide liquidity relief and to ensure financial system stability.
By May 2023, domestic debt restructuring will be complete, and by September 2023, external debt restructuring will be complete.
Lazard intensively evaluates State Banks asset quality
