Wickremesinghe at a loss on losses to EPF

Fact Check

In response to a question from Frances Harrison, Director of the International Truth and Justice Project, regarding the Employees’ Provident Fund (EPF), the former President, in his claim, asserted that no one has lost even a cent in the ‘EPF’ due to debt restructuring.

FactCheck.lk consulted the Ministry of Finance publications related to Domestic Debt Restructuring to verify the claim.

There are three methods used to restructure debt: (i) nominal reduction of the maturity value (face value haircut), (ii) interest rate reduction (coupon haircut), and (iii) maturity-extension (reprofiling).

The former president’s claim was that the bonds held by the EPF were subject to only a maturity-extension/reprofiling (third method); hence, the EPF bond holdings did not suffer any loss in value. However, he is wrong on two counts: first, reprofiling was not the only method used, and second, the reprofiling did result in a loss of value.

First, bonds held by the EPF were not subject only to reprofiling but also to a coupon haircut. Calculations on the published data show that in the restructure the weighted average coupon on the bonds that were subject to surrender was 12.1%. In comparison, the weighted average coupon on the replacement bonds issued was 9.7%. That is, there was a coupon haircut in addition to the reprofiling.

Second, reprofiling does result in a loss if the surrendered bonds were purchased at a price below its face value (referred to as a price below par). If bought at par, the overall rate of return on the bond is the coupon rate. But when bought below par the return depends on the date the face value is repaid. Therefore, reprofiling (delaying the repayment) reduces the rate of return on the bond, when bought at a price below par.

The bonds subject to restructuring were equally accessible to all market participants, including the EPF, at the government auction. The data shows that the government sold these bonds at prices below par (see Additional Note). Therefore, reprofiling them also caused an additional loss (reduction in the rate of return) to the EPF on top of the loss caused by the coupon haircut.

The former president was wrong in asserting that there was only a reprofiling of EPF bonds and also wrong in asserting that reprofiling those bonds did not cause a loss.

Therefore, we classify the former president’s claim as BLATANTLY FALSE.

*FactCheck.lk’s verdict is based on the most recent information that is publicly accessible. As with every fact check, if new information becomes available, FactCheck.lk will revisit the assessment.

Additional Note: To verify that the bonds subject to surrender in the restructure were bought at a price below par, FactCheck.lk used the data published by the CBSL, found here. This has the face value and price of the bonds sold by the government as well as the ISIN numbers of the bonds surrendered in the restructure. FactCheck.lk calculated that the total face value of the bonds exchanged amounted to LKR 3,204 billion. And that the price at which these bonds were sold was LKR 2,907 billion, which means they were sold at 9.3% below par.