Zambia closer to default as it skips interest payments
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 pandemic.
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 group 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 Bwalya Ng’andu, Zambia’s finance minister. It has a 30-day grace period before it becomes a default event allowing bondholders to demand immediate repayment of the principal.
At the center of Zambia’s case is how commercial investors are treated in a planned debt restructuring.
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.
“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.”
‘Absence of Progress’
The Group of 20 agreed Wednesday to renew a debt-relief initiative for the poorest countries through the first half of 2021.
The group said in a statement it was “disappointed by the absence of progress of private creditors’ participation” in its Debt Service Suspension Initiative.
It’s working on a framework that could serve as a blueprint for government debt restructuring.
Eurobond holders want Zambia to sign up for an economic program with the International Monetary Fund before tackling its commercial debt.
But the country’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 as much as a third of the nation’s $12 billion of external debt.
Zambia already gained some relief from the Paris Club group of bilateral lenders and said it wants all commercial and bilateral creditors, including bondholders, to commit to similar measures.
Skipping the Eurobond interest payment was part of that process and done at the urging of Zambia’s debt advisers, including Lazard Freres and White & Case, Ng’andu told lawmakers Thursday.
“They were of the strong view and opinion that if we pay we were going to create a very hostile environment within which to negotiate with other creditors, because we would have departed from the principal of pari passu,” Ng’andu said.
“Based on that, we didn’t make the payment that was due yesterday. Not because we didn’t have the money to pay, but because the issue of treating all the creditors equitably is a very important part of the process that we are going through.”
Zambia’s Eurobonds slumped for a third day on Thursday, and are trading at less than half their face value.
Notes due 2024 fell 5.5% to 41.7 cents on the dollar by 3:07 p.m. in London, the lowest on a closing basis since May.
The securities have lost 14% of their face value since Monday.
While the pandemic has contributed to Zambia’s debt woes, the IMF warned more than two years ago that the nation was already at high risk of debt distress after a borrowing binge.
Still, a rebound this year in copper prices which Zambia relies on for about 70% of export earnings means that the government could probably stay current on Eurobond coupons if it chose to.
The government should focus on extending maturities of the notes, according to Richard Briggs, a fund manager at GAM Holding AG in London, which holds Zambian bonds.
“I think at these levels, Zambia is worth holding as recovery values, even if the negotiations might last beyond the elections, should in the case of Zambia be generous versus current trading levels,” he said.
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