The proposal sent on Oct. 2 provides a write-down, or haircut, on both capital and interest, added the sources who declined to be named because the talks are private.

It foresees issuance of regular sovereign bonds and also of so-called Macro Linked Bonds (MLBs), which will automatically lower coupon payments starting in 2027 if Sri Lanka fails to meet some of the economic targets linked to its International Monetary Fund (IMF) programme.

The overall proposal includes an option for creditors that combines MLB notes with a regular bond and a second option of regular bonds with a Value Recovery Instrument (VRI), one of the sources said.

The MLBs were included to ensure the new instruments would be index-eligible, the sources said.Bonds included in an index generally have more liquidity.