Zambia Closer to Eurobond Default as It Skips Interest Payment


Thursday, October 15, 2020 / 02:07 PM / by Matthem Hill and Taonga Clifford Mitimingi of Bloomberg / Header Image Credit: Alamy


  • Country says it can't meet obligations without debt standstill
  • Test case for indebted nations seeking relief from creditors


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.


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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.



The post Zambia Closer to Eurobond Default as It Skips Interest Payment first appeared in Bloomberg on October 15, 2020.

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