Zambia announced that it had struck a preliminary agreement in principle on the restructuring of $3 billion of its foreign bonds with a critical creditor group. This marks a significant achievement in Zambia’s protracted process of reworking its debt.
The transaction intends to restructure claims on three existing bonds by issuing two new “amortizing” bonds with maturities of 2035 and 2053, respectively, based on an economic “base case” scenario. These repayments would go towards both the interest and the principal of the bonds.
If Zambia’s economy were to improve, the second note would also mature in 2035 simultaneously, and coupon payments would increase.
According to the terms of the deal, the face value of the new bonds would be set at $3.135 billion, regardless of whatever scenario was played out. This figure would be higher than the initial face value of the previous notes, which was $3 billion.
The nominal haircut is computed to be 18%. However, this figure considers the $821 million in past-due interest (PDI) that the nation has not paid since it defaulted on its debts. According to a statement from the ministry, the agreement would provide a cash flow relief of $2.5 billion for the duration of the nation’s $1.3 billion IMF program, which is due to end in late 2025.
Zambia’s reorganization process has experienced numerous delays, even though it was the first African government to breach its COVID-19 obligations late in 2020. In addition, international bondholders voiced their dissatisfaction with being excluded from the process, which began with drawn-out discussions with bilateral creditors, one of whom was China.
Situmbeko Musokotwane, Zambia’s minister of finance, said the arrangement “paves the way for similar restructuring agreements with our other private creditors.”
“We hope for the swift implementation of this agreement in principle by the end of the year.”
According to statistics compiled by Tradeweb and MarketAxess, the price of each of Zambia’s three foreign bonds, increased significantly following the announcement, going up by as much as 3.9 cents on the dollar. Bonds maturing in 2024 and 2027 received bids equal to or slightly below 60 cents on the dollar.
The Zambia External Bondholder Steering Committee released a separate statement expressing its approval of the deal. It stated it would “restore full international capital market access to Zambia and encourage long-term investment in the country.”
INVESTMENT FOR THE LONG TERM
Suppose the economy performs better than anticipated over an observation period from January 2026 to December 2028. In that case, the contract enables bondholders to get a better payoff more quickly than was previously possible.
For this to happen, the composite indicator needs to go up, meaning that the country can handle more debt, or hard-currency receipts need to go above and beyond what the IMF predicted on a three-year rolling average.
The new $2 billion 2035 bond will begin amortizing in 2023 and will continue to pay a yield of 5.75% until September 2031, after which it will start paying 8% until maturity. This is true in both of the deal’s economic scenarios.
On the other hand, the second bond for $1.135 billion is structured to amortize through three equal payments made in the years 2051, 2052, and 2053, along with a coupon of 0.5 percentage points for the “base case” scenario. In the “best-case scenario,” the maturity date would be moved to 2035, and amortization would begin in 2032. Additionally, interest payments would increase by a factor of three.
According to a person acquainted with the thinking of the bondholder committee, this “step-up” bond is a first in sovereign debt restructurings. Similar securities might be available in future debt relief operations, according to the same source.
According to the source, who requested anonymity to speak freely about the matter, it was unclear whether or not the bond would be qualified for inclusion in JPMorgan’s Emerging Markets Bond Index (EMBI).
Inclusion in key fixed-income indexes will often increase the instrument’s liquidity.
According to the statement, the next step that has to be taken is for the government to bring the deal up for a vote of bondholders through a process known as an exchange offer. Since the first amortization payments will start in December, this process must begin by the third week of November.
According to Zambia’s finance ministry, the committee of bondholders owns or controls 40 percent of the bonds that are currently in circulation.
According to the statement released by the committee, the members of its steering committee are Amia Capital LLP, Amundi, RBC BlueBay Asset Management, Farallon Capital Management, and Greylock Capital Management. Generally, the steering committee is responsible for taking the lead role in any talks.
At the beginning of this month, Zambia agreed with its official creditors to restructure around $6.3 billion worth of debt. China and other members of the Paris Club of Creditor Nations were included in the agreement.
