UPDATE 1-Sri Lanka's foreign bondholders eye GDP-linked bonds for debt restructuring - source

(Updates with source, details of discussed proposal) By Jorgelina do Rosario March 20 (Reuters) - Sri Lanka's foreign private creditors are considering proposing swapping the country's defaulted bonds for new securities where cash flow is linked to its economy's future growth, according to a person with direct knowledge of debt restructuring talks. Such bonds, known as state-contingent debt instruments, would be designed to automatically adjust variables such as coupon payments and maturities if the island nation's economy underperforms, according to the person, who asked not to be named because talks are private.

The GDP-linked bonds would be based on International Monetary Fund's projections for Sri Lanka's economy. The latest IMF forecasts see it progressing from a 3% contraction in 2023 to a 3.1% growth in 2027.

"An independent and credible party should do the GDP calculations to provide certainty," the person said, adding that designing such instruments would be the main challenge. "The bond has to be liquid enough, we can't struggle to price it," the person said.

Bloomberg News reported the story earlier. Sri Lanka needs to restructure over $13 billion it owes overseas private creditors while it struggles with its worst financial crisis in more than seven decades. The country is set to receive a final approval on a $2.9 billion bailout from the IMF's executive board this week. (Reporting by Lavanya Ahire in Bengaluru and Jorgelina do Rosario in London, Editing by Bernadette Baum and Tomasz Janowski)