Hard default looms for Zambia
Creditors say the government has so far not presented a convincing plan to make its debt sustainable.
Karin Strohecker
Holders of Zambia's Eurobonds plan to reject a government request to defer payments on its sovereign US dollar debt, according to four sources, pushing the country closer towards a protracted debt overhaul and possible hard default.
Zambia, which was struggling with mounting debts even before the coronavirus pandemic as a result of the plunge in prices for copper, its main export, has three outstanding dollar-denominated Eurobonds with a total face value of US$3 billion.
It asked in September to delay interest payments until April but was forced to extend the deadline for creditors to vote on the payment deferral plan to 13 November after failing to secure a quorum of bondholders.
This date is also the end of the 30-day grace period for a US$42.5 million coupon payment that was due on 14 October.
Non-payment would push Zambia into default on its Eurobonds.
BLOCKING STAKE
A person familiar with the thinking of the Zambia External Bondholder Committee - a large group of creditors holding more than 40% across all Zambia's bonds and a blocking stake in each issue - said they were likely to reject the government's plan.
“This time round, instead of taking no action, they will in all likelihood be obliged to vote against it as 13 November is the cut-off for the grace period,” the source said.
“You can't realistically begin a constructive and open dialogue while someone is holding a gun to your head.”
The group could already have killed off the process but had chosen to give Zambia more time, the source added.
Zambia's government declined to comment.
It still has the option of paying the coupon to avoid default, with its next coupon payment not due until January.
CREDIBLE PLAN NEEDED
Creditors said the government had not contacted them ahead of launching the consent solicitation and had so far not presented a convincing plan to make its debt sustainable.
“We need transparency, engagement and a credible programme,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management, adding she would be surprised if investors consented without having those pieces of information.
“There has to be a credible plan that the debt can be sustained, which we don't have at the moment.”
Zambia's debt-to-GDP ratio is expected to top 100% this year, having ballooned from just over 30% in 2014.
Its external public debt burden is some US$12 billion, with US$3.5 billion of bilateral debt, US$2.9 billion of other commercial debt and US$2.1 billion owed to multilaterals as well as the US$3 billion of Eurobonds. It owes about US$3 billion to China.
Creditors said a lack of progress in talks with the International Monetary Fund was disheartening while a deal to defer debt repayments due in October on a China Development Bank loan lacked detail such as size or terms.
“The Zambians offer us basically two options: either we don't pay you now or we don't pay you later,” said another creditor, who had already voted to reject the proposal.
Zambia's US dollar bonds are currently trading at 43-45% of face value, according to Tradeweb data. – Nampa/Reuters
Holders of Zambia's Eurobonds plan to reject a government request to defer payments on its sovereign US dollar debt, according to four sources, pushing the country closer towards a protracted debt overhaul and possible hard default.
Zambia, which was struggling with mounting debts even before the coronavirus pandemic as a result of the plunge in prices for copper, its main export, has three outstanding dollar-denominated Eurobonds with a total face value of US$3 billion.
It asked in September to delay interest payments until April but was forced to extend the deadline for creditors to vote on the payment deferral plan to 13 November after failing to secure a quorum of bondholders.
This date is also the end of the 30-day grace period for a US$42.5 million coupon payment that was due on 14 October.
Non-payment would push Zambia into default on its Eurobonds.
BLOCKING STAKE
A person familiar with the thinking of the Zambia External Bondholder Committee - a large group of creditors holding more than 40% across all Zambia's bonds and a blocking stake in each issue - said they were likely to reject the government's plan.
“This time round, instead of taking no action, they will in all likelihood be obliged to vote against it as 13 November is the cut-off for the grace period,” the source said.
“You can't realistically begin a constructive and open dialogue while someone is holding a gun to your head.”
The group could already have killed off the process but had chosen to give Zambia more time, the source added.
Zambia's government declined to comment.
It still has the option of paying the coupon to avoid default, with its next coupon payment not due until January.
CREDIBLE PLAN NEEDED
Creditors said the government had not contacted them ahead of launching the consent solicitation and had so far not presented a convincing plan to make its debt sustainable.
“We need transparency, engagement and a credible programme,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management, adding she would be surprised if investors consented without having those pieces of information.
“There has to be a credible plan that the debt can be sustained, which we don't have at the moment.”
Zambia's debt-to-GDP ratio is expected to top 100% this year, having ballooned from just over 30% in 2014.
Its external public debt burden is some US$12 billion, with US$3.5 billion of bilateral debt, US$2.9 billion of other commercial debt and US$2.1 billion owed to multilaterals as well as the US$3 billion of Eurobonds. It owes about US$3 billion to China.
Creditors said a lack of progress in talks with the International Monetary Fund was disheartening while a deal to defer debt repayments due in October on a China Development Bank loan lacked detail such as size or terms.
“The Zambians offer us basically two options: either we don't pay you now or we don't pay you later,” said another creditor, who had already voted to reject the proposal.
Zambia's US dollar bonds are currently trading at 43-45% of face value, according to Tradeweb data. – Nampa/Reuters
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