Fitch Ratings further downgrades Sri Lanka's LTLC

The Sri Lankan government's plan for domestic debt treatment is a significant step toward addressing questions about the impact of the sovereign's debt restructuring on the local banking industry, according to Fitch Ratings, but issues may occur due to a variety of variables.

The plan eliminates banks' holdings of Sri Lankan rupee-denominated government securities, which will relieve some of the strain on their already stressed capital positions caused by deteriorating loan quality and currency depreciation, expressed the Ratings Agency. Fitch's base scenario anticipated that banks' treasury bills would not be subject to restructuring, but that their government bond holdings would. 

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-'.

"In Fitch’s view, the proposed Domestic Debt Optimisation (DDO) will qualify as a distressed debt exchange (DDE) under their criteria, as it entails a material reduction in terms and is needed to avoid a traditional payment default", said the ratings agency's.