The Ministry of Finance said in a press release today (here) that “Should Zambia fail to reach an agreement with its commercial creditors (including holders of its Eurobonds) on the terms of the appropriate standstills, as previously stated, the Republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulating arrears.”
This implies that the government does not intend to pay the US$42.5mn coupon due on its 2024 eurobond tomorrow despite its failure to receive approval from creditors on its request for a six-month repayment standstill (see here). If agreement cannot be reached before the 30-day grace period expires on 13 November (which we deem unlikely), then Zambia will effectively be pushed into a “hard default”.
While Zambia “remain(s) committed to ensuring equitable treatment of all our creditors and ensuring transparency in our engagements,” a group of creditors holding 40% of outstanding eurobonds (a blocking stake) said in a statement to government on 30 September that it was “unable to provide a positive response” until a number of concerns had been addressed.
Foremost among them is the demand for more concrete information on the scale of outstanding debt to China, and assurances that the government will treat that debt on equal terms with creditors. However, an article in the Financial Times today suggests that Zambia is having trouble closing a deal on relief with a range of official and commercial Chinese creditors (see here).
A number of official Chinese creditors have insisted that they will only participate in debt relief if the US$201mn of existing arrears is cleared, while Zambia has requested that Chinese arrears be deferred in line with treatment under the G20’s DSSI and its request to bondholders. In a Q&A document released last week (see here), the government disclosed total external arrears of US$485mn as of June.
Failure to defer Chinese arrears would effectively place Chinese creditors in a more senior position than other bilateral, multilateral and commercial lenders, and would be a major sticking point in restructuring negotiations. Meanwhile, if creditors do not agree to Zambia’s consent solicitation and the government sticks with plans to pursue a “hard default” on its commercial debt at the expiration of its grace period on 13 November, that would be a signal of difficult negotiations to follow.
With outstanding eurobonds of US$3bn and identified debt to China at US$3.1bn at end-19 (excluding China’s undisclosed portions of the US$3.5bn of “non-Paris Club” bilateral debt and “other” commercial, with Johns Hopkins recognising US$9.7bn of disbursements of Chinese debt to the public and private sectors since 2000 – here), it will be essential to get both groups on board for a restructuring to succeed.
Zambia has tried to entice creditors to agree to the standstill by offering to recognise deferred interest on the delayed coupon payments, a reversal of its prior stance that additional interest would not accrue. However, this concession is unlikely to move the needle absent more clarity on the stock of Chinese debt and treatment thereof.
We continue to think that Zambia’s self-imposed deadline of 14 April to agree on an IMF program and restructuring plan is unrealistic in the current climate, and today’s press release cements that view. The government will struggle to commit to needed reforms ahead of August 2021 elections (see here), which will likely prevent IMF funding and makes a restructuring unlikely within the next 12 months.
With the debt burden continuing to mount in the interim, a more onerous restructuring will probably be required by the time it is finalised, at least relative to our initially sanguine views (here) of cashflow relief and minimal nominal haircuts amid at least a token level of capex-induced fiscal consolidation. We retain our Sell recommendation on Zambia 24s.