Fidelity among big Sri Lankan debt holders staring down default risk

NEW YORK (BLOOMBERG) - Global asset managers including Fidelity Investments and T. Rowe Price Group could be staring down the risk of default in Sri Lanka in the face of a deepening economic crisis.

Fidelity Investments' parent FMR, Lord Abbett & Co and T. Rowe Price Group were among the largest overseas holders of the island nation's US$12.6 billion (S$17.1 billion) in foreign debt, according to holdings most recently disclosed by investors in data compiled by Bloomberg.

FMR held US$114.3 million of the debt, Lord Abbett had about US$78 million and T. Rowe owned US$32.6 million, followed by Payden & Rygel and SEI Investments, the data show.

Sri Lanka's investors are growing concerned about whether the country will be able to keep up on its foreign debt obligations as inflation and protests hit the family that has ruled the nation with an iron fist for most of the last 15 years. Anger over hours-long power cuts and food and fuel shortages has spilled unto the streets, leading President Gotabaya Rajapaksa to replace his cabinet and appoint a new central bank head this week. The nation is also struggling with a cash crunch that has triggered capital controls and import curbs.

Such global investors owned nearly 4 per cent of the nation's outstanding sovereign dollar debt, according to the latest available data via filings disclosed at different points in time. For Fidelity, for example, one of the most recent sources of data available is for an exchange-traded fund as at April 4, while some of the firm's other funds last disclosed holdings on Feb 28 or earlier.

"Recent unrest and political uncertainty mean any investor now is attempting to catch a falling knife," said Renaissance Capital global chief economist Charlie Robertson. "We think most investors will wait on more political clarity and evidence of an IMF (International Monetary Fund) deal, which does improve recovery values, before taking the plunge into local assets."

The next key test for Sri Lanka's bond holders will be on April 18, when the government must pay US$36 million in interest on a bond maturing in 2023 and US$42.2 million on a 2028 note, according to Bloomberg data. The government also has to pay US$1.03 billion in principal and interest on a maturing note on July 25.

Sri Lankan debt slumped over the past years as cities were shuttered and tourism - the nation's main industry - skidded to a halt. US dollar bonds due in July 2022 were indicated two cents on the dollar lower at 55.5 cents on Wednesday morning (April 6).

The extra yield investors demand to hold Sri Lanka's sovereign debt, on average, over United States Treasuries have widened to 29.99 percentage points, according to JPMorgan Chase & Co data, well above the 10-percentage point threshold for distressed debt.

Bloomberg's search for top holders includes holdings of passive funds, such as exchange-traded funds, which have little choice in what they buy or sell. It is also worth noting that Bloomberg's data does not necessarily include holdings by investors that are not required to disclose their debt transactions.