- Bondholders reject consent solicitation, which will push Zambia into default if it fails to pay coupon before cob today
- Rejection is unsurprising
- Zambia is yet to demonstrate progress on debt transparency or IMF funding
By the close of business today Zambia could become the fifth country globally and first in sub-Saharan Africa to default since Covid began. Zambia’s troubles pre-date the pandemic, with debt/GDP rising over 6x over the past decade amid aggressive public borrowing and a refusal to seek help from the IMF, and should therefore not be seen as a bellwether for other African credits.
Today bondholders rejected Zambia’s consent solicitation to delay US$120m worth of eurobond coupons due from 14 October to 14 April, after having refrained from voting it down on 20 October to give the government more time to provide more clarity on its Chinese debt stock and make progress towards IMF funding.
The grace period on the US$42.5m coupon payment due 14 October expires today, meaning that Zambia has until the end of the day to make the payment or enter default. The Ministry of Finance had previously said that, should the standstill be rejected, they would be unable to make payments. However, the picture was complicated today when Vice President Inonge Wina said in parliament that “I can assure the honourable members that Zambia will not default.” In addition, the government budgeted for eurobond payments in 2021 in case the standstill is rejected, creating mixed messages.
However, Finance Minister Ng’andu said in a text message to bondholders after the standstill was rejected that “Given our precarious fiscal position that requires us to treat all creditors pari-passu, Zambia would unfortunately have no other alternative but to accumulate arrears,” seemingly affirming Zambia’s intention to default. Bonds initially rallied today on Wina’s comments but are now largely flat on the day and are still down 10pts since mid-September.
Even if Zambia pays the coupon today as a token of good faith, it has been clear about its intention to restructure and this would therefore just delay the inevitable. However, it could still be positive to the extent that it signals more consensual negotiations and as an illustration of creditor power, which could enhance recovery values.
The lack of market movement shows that default was largely priced in heading into the day, with the government already telegraphing its intention to forego payment regardless of the consent solicitation outcome. And with S&P already downgrading Zambia to ‘SD’ last month, much of any potential forced selling has probably already taken place (though Fitch still rates Zambia ‘C’ and Moody's rates it ‘Ca’).
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