(Bloomberg) — Zambia’s Eurobonds slumped for a second day as the country appeared to be heading for a default amid a showdown with bondholders over its request for an interest payment holiday.
The southern African nation has asked holders of its $3 billion of Eurobonds to accept a six-month standstill on about $120 million of coupon payments while it works on a debt-restructuring strategy. The first, of $42.5 million, is due on Wednesday, though there is a 30-day grace period before the country is technically in default.
Eurobond holders are due to meet on Oct. 20 to vote on the proposal, and a group of holders already said they couldn’t vote in favor without further assurances and transparency from Zambia. Rafael Molina, an adviser to the group, declined to comment on Wednesday.
“We have yet to receive enough details from Zambian officials to vote on the consent,” said Kevin Daly, investment director at Aberdeen Standard Investments, which owns Zambian bonds. “I think having a dialog would be more constructive than issuing press releases.”
Zambia has over the past decade taken on nearly $12 billion of debt, even as growth slowed and foreign-exchange reserves dwindled. The pandemic accelerated the crisis. The country is seen as a test case for how indebted nations will deal with competing interests from commercial and non-commercial lenders. As much as one-third of the country’s external debt is owed to Chinese lenders.
“It seems unlikely that the government will receive its deferral request, putting additional pressure on the government to ensure that it makes all the necessary payments if it is to avoid a default in future,” Neville Mandimika and Daniel Kavishe, Johannesburg-based analysts at Rand Merchant Bank, said in a client note. “To ensure smooth debt management, the government must involve China and its agencies in its deliberations.”
The only foreign-currency debt that Zambia will continue to pay on time is to multilateral agencies and debt for a few priority projects that have an immediate economic and social impact, Fredson Yamba, the secretary to the Treasury, said in an emailed statement Tuesday. The country is already $485 million in arrears on foreign debt, including $183 million to bilateral lenders and $256 million on commercial loans, according to the finance ministry.
“Should Zambia fail to reach an agreement with its commercial creditors, including holders of its Eurobonds, on the terms of the appropriate standstills, the Republic with its limited fiscal space will be unable to make payments,” Yamba said.
Zambia’s 2024 Eurobonds plunged 4.6% to 45.5 cents on the dollar by 9:33 a.m. in London on Wednesday after falling 1.5% on Tuesday.
If bondholders approve the standstill, Zambia “will recognize interest accruing on deferred coupons in the restructuring process, at a rate to be determined in good faith with noteholders,” Yamba said.
Read more: Chinese Debt Renegotiations Could be Long and Unpredictable
In Africa, more than a dozen countries are in talks with China to freeze debt payments under a debt service suspension initiative agreed by the Group of 20 leading economies in April. Much of those negotiations, however, are done behind closed doors, raising complaints from commercial creditors worried that China will win better terms in upcoming debt restructuring.
(Updates with bondholder and analyst comments from third paragraph.)
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