Zambia Pact with Eurobond Holders Reduces Debt Default Risk
Zambia’s agreement with Eurobond holders could reduce the country’s debt default risk, according to Fitch Ratings. The authority is striving to boost fiscal performance and drive economic growth following its debt default that locked out the country from external financing.
In its commentary note, Fitch Rating said the announcement of an agreement between the Zambian government and representatives of the country’s Eurobond holders is a positive development.
The global rating agency believes that the agreement with its foreign investors could help Zambia to move out of default. Nevertheless, there are still potential hurdles that could impede a successful debt exchange.
“Once Zambia has reached an agreement with creditors on restructuring its Eurobonds and we assess that it has completed that restructuring process, we would move its Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) out of ‘Restricted Default’ (RD)”, Fitch said.
The global rating firm said then it would assign a rating based on a forward-looking assessment of the sovereign’s willingness and capacity to honour its foreign-currency debt obligations.
“We affirmed Zambia’s Long-Term Local-Currency IDR at ‘CCC’ in December 2022”,.
It noted that the agreement between the steering committee of the ad hoc creditor committee of Eurobond holders for the three Eurobonds maturing in 2022, 2024 and 2027 brings this restructuring a step closer.
The proposed debt exchange entails an 18% haircut to bondholders’ current notional claims of just over USD 3.8 billion. As with the June agreement with the Official Creditor Committee (OCC), the deal includes a contingency element offering benefits to creditors.
Fitch Ratings said the remaining claims are restructured into two bonds, one of which has a step-up in payments and an earlier maturity under an upside case.
The International Monetary Fund (IMF) confirmed in July that implementing the OCC agreement and a comparable agreement with private creditors would enable Zambia’s debt to be assessed as sustainable, with a moderate risk of debt distress over the medium term, under both the baseline and upside scenarios.
The upside will be triggered irrevocably if either of two conditions are met between January 2026 to December 2028, with the associated review assessments being made at the bond’s semi-annual payment dates.
The first is if Zambia’s Composite Indicator (CI, a measure of debt carrying capacity used by the IMF and World Bank) meets or exceeds the medium threshold of 2.69 for two consecutive assessments. This compares with its score of 2.59 (weak) recorded both in 2022 and at the first review of the IMF’s Extended Credit Facility (ECF) in July 2023.
The second condition would be met if the three-year rolling average of Zambia’s US dollar exports and US dollar-equivalent fiscal revenues, excluding grants, exceeds the IMF’s projections as laid out in the ECF’s First Review.
“We view the IMF’s assumptions around copper prices and export volume growth as relatively optimistic, though recent investments could help to boost copper production and exports. However, we believe the CI trigger may be met, most likely in 2026”.
It seems unlikely any single variable included in the CI score calculation would, ceteris paribus, reach a 10-year average sufficiently high to get a score of 2.69 between 2026 and 2028.
Fitch said it believes the trigger is likely to be reached through a combination of improved import coverage of reserves and stronger global real GDP growth.
According to the firm, triggering the step-up would increase debt service, but this would not undo the improved outlook for the sovereign credit profile under the upside case.
Progress towards a debt exchange could still be interrupted if the deal reached with the steering committee fails to secure sufficient support among wider Eurobond holders, it said in its commentary note.
According to authorities, members of the steering committee currently own or control approximately 18% of the outstanding bonds, and the broader ad hoc committee more than 40%.
However, the Eurobonds maturing in 2022 and 2024 do not contain collective action clauses that ease an orderly debt restructuring by reducing the influence of holdout creditors. The formal launch of the debt exchange is planned for the third week of November.