Sri Lankan Airlines was likely advised to pay the interest on its bond due in 2024 due to the complexity of restructuring it together with sovereign and other external debt. The airline may have been concerned about the adverse consequences that may arise upon non-payment in relation to the cross-default clauses of its lease agreements.
Sri Lankan Airlines’ failure to pay interest on its bonds would have opened up the possibility for the seizure of aircrafts, a lawyer has said.
If Sri Lankan Airlines had defaulted on its bonds, its lessors would have been entitled to seize their respective aircraft, similar to the Aeroflot incident, says Mr. Fernando.
He adds that in the case of sovereign bonds, there are no assets owned by the Government that can be seized. This could have led to a situation where Sri Lankan’s lessors would have been entitled to seize their respective aircraft, similar to the Aeroflot incident.”
In April 2022, University of North Carolina Professor of Law Mark Weidemaier and University of Virginia Professor of Law Mitu Gulati commented on the Government-guaranteed bond issued by Sri Lankan Airlines due in 2024 on their podcast Mitu & Mark, describing it as a poorly drafted bond.
The Sri Lankan Airlines bonds are governed by English Law and disputes are to be resolved by arbitration in Singapore, which will complicate the debt restructuring process. The small size of the airline bond ($ 175 million), it would be relatively easy for any bondholder to acquire a blocking stake in the respective bonds.
Sri Lankan Airlines bonds have appreciated since falling below 40 cents on the dollar on 22 April 2022 and are currently trading at above 50 cents. In contrast, Sri Lanka’s ISBs have been on a downward trend within this period. They theorized that Sri Lanka would pay this airline bonds in full considering the urgency of its debt restructuring process.
On Tuesday (26), Sri Lankan announced that it had settled the interest payment relating to its $ 175 million Government-guaranteed bond due in 2024. This raised several concerns because the Finance Minister on 12 April 2022 had announced the suspension of all foreign debt servicing including State-Owned Enterprise (SOE) debt.