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Thursday, October 15,
2020 / 02:07 PM / by Matthem Hill and Taonga Clifford Mitimingi
of Bloomberg / Header Image Credit: Alamy
Zambia skipped an interest payment on its debt, moving
closer to becoming the first African nation to default on dollar bonds since
the onset of the coronavirus.
Holders of Zambia's $3 billion of Eurobonds will vote
next week on the country's request for a six-month interest-payment holiday. A
core croup of creditors have already rejected the proposal, prompting Zambia to
say it won't be able to service its commercial debts including the bonds unless
it gets the relief.
The government failed to make a $42.5 million interest
payment yesterday, according to a person with direct knowledge of the
situation. It has a 30-day grace period before it becomes a default event,
allowing bondholders to demand immediate repayment of the principal.
The showdown with creditors makes it a test case for
nations worldwide battling to meet obligations to a range of lenders, from
bondholders to Chinese state banks. It also highlights the role of private
creditors in the global drive to assist poorer, highly indebted nations.
The Group of 20 agreed Wednesday to renew a
debt-relief initiative for the poorest countries through the first half of
2021, with the possibility to extend it by a further six months. The group said
in a statement it was "disappointed by the absence of progress of private
creditors' participation" in its Debt Service Suspension Initiative.
Demanding Transparency
At the center of Zambia's case is how commercial
creditors are treated in a planned debt restructuring. Eurobond holders want
the government to sign up for an economic program with the International
Monetary Fund before tackling its commercial debt.
But Zambia's debt levels are significantly above the
Washington-based lender's thresholds, and a general election in 10 months makes
deep spending cuts less likely. There are also questions about transparency
around borrowing from China, which accounts for roughly a third of the nation's
$12 billion of external debt.
"Zambia is between a rock and a hard place with the
IMF demanding transparency on Chinese loans and the political economy going
into the elections," said Ron Raychaudhuri, an emerging-market fund manager at
APG Asset Management in Amsterdam. "Some Chinese lenders also seem to be
reluctant to allow a moratorium until arrears are dealt with".
Zambia's Eurobonds slumped for a third day on
Thursday, and are trading below half their face value. Notes due 2024 fell 1.8%
to 43.4 cents on the dollar by 9:40 a.m. in London. The finance ministry didn't
respond to a call or email on the coupon payment on that bond.
Eurobond holders are due to meet on Oct. 20 to vote on
the standstill proposal. Rafael Molina, an adviser to a group holding about 40%
of the Eurobonds, declined to comment on Wednesday.
"We have yet to receive enough details from Zambian
officials to vote on the consent," said Kevin Daly, investment director at
Aberdeen Standard Investments, which owns Zambian bonds. "I think having a
dialog would be more constructive than issuing press releases".
In Africa, more than a dozen countries are in talks
with China to freeze debt payments under a debt service suspension initiative
agreed by the G-20 leading economies in April. Much of those negotiations,
however, are done behind closed doors, raising complaints from commercial
creditors worried that China will win better terms in upcoming debt
restructuring.
Involving China
"It seems unlikely that the government will receive its deferral request," Neville Mandimika and Daniel Kavishe, Johannesburg-based analysts at Rand Merchant Bank, said in a client note. "To ensure smooth debt management, the government must involve China and its agencies in its deliberations".
The only foreign-currency debt that Zambia will
continue to pay on time is to multilateral agencies and a few priority projects
that have an immediate economic and social impact, Fredson Yamba, the secretary
to the Treasury, said in an emailed statement Tuesday. The country is already
$485 million in arrears on foreign debt, including $183 million to bilateral
lenders and $256 million on commercial loans, according to the finance
ministry.
If bondholders approve the standstill, Zambia "will
recognize interest accruing on deferred coupons in the restructuring process,
at a rate to be determined in good faith with noteholders," Yamba said.
Credit:
The post Zambia
Closer to Eurobond Default as It Skips Interest Payment first appeared in Bloomberg on
October 15, 2020.
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