Sri Lanka's bondholders signed off on the government's proposal to restructure its $12.55 billion of international bonds, a key step in finalising the island nation's debt overhaul.

Final results showed holders representing 97.86% of the outstanding principal on the existing bonds voted in favour of the plan, which will swap Sri Lanka's defaulted bonds for a series of new fixed income instruments, the government said in a statement dated Dec. 16.

Sri Lanka defaulted on its foreign debt for the first time in May 2022 due to its high debt burden and dwindling foreign exchange reserves.

With the finalising of the bond exchange, Sri Lanka will become the fourth country to conclude a restructuring of its bonds this year, following in the footsteps of Ghana, Ukraine and Zambia.

The South Asian island nation's new instruments include a governance-linked bond, which offers a 75-basis-point reduction in the interest rate payable if Sri Lanka meets certain governance targets, and several bonds linked to economic performance.

A breakdown of the data showed investor support across all bar one of the bonds - the 2022 maturity - passed the threshold required that would see the whole bond swapped out in its entirety for the newly created instruments.

In the 2022 bond, which does not feature so-called aggregated collective action clauses, holders representing just 73.13% voted in support of the proposal.

Collective action clauses - or CACs - have been widely introduced to bond contracts over the past two decades and are designed to speed up debt restructuring and prevent so-called holdouts scuppering the process in a bid to receive a better payment.

Analysts pointed to Hamilton Reserve Bank, which holds a chunk of the 2022 bond and sued Sri Lanka in New York courts for a full payout as one investor holding out for better terms.

"This means that Hamilton Reserve Bank, which holds over a quarter of the 2022 bonds, has decided to continue holding out," said Patrick Curran at Tellimer in a note.

Hamilton Reserve Bank did not immediately respond to a request for comment. Sri Lanka's finance ministry and the president's office declined to comment.

The holdout will not immediately affect the overall bond exchange, and investors in the 2022 bond, who supported the government's proposal, are in line to receive the new bonds in the exchange for the defaulted ones like the holders of all others, according to a source familiar with the situation.

The government said in its regulatory notice that holders of the 2022 bonds who did not opt to take part in the exchange would continue to hold their 2022 bonds.

(Reporting by Karin Strohecker in London and Chandini Monnappa and Chris Thomas in Bengaluru; additional reporting by Uditha Jayasinghe, Editing by Mrigank Dhaniwala and Christina Fincher)