Zambia to exit sovereign default as bondholders back restructuring

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Zambia is closer to ending almost four years in default on its sovereign debt after nearly all holders of the southern African nation’s US dollar bonds voted to approve a long-delayed restructuring plan.

Holders of more than 90 per cent of the nearly $4bn in bonds had already backed the plan by last week ahead of a May 30 deadline, Zambia’s finance ministry said on Tuesday.

The support means Africa’s second-biggest copper producer is on track to implement a restructuring of the debt next month, after its 2020 bond default highlighted growing problems with the international architecture for resolving debt crises in poor countries.

President Hakainde Hichilema’s government finalised a deal on the bonds only in March after overcoming objections by China, Zambia’s largest creditor, that an initial agreement appeared to favour bondholders over other lenders.

“After nearly four years since we initially defaulted on our eurobonds, the close of the restructuring chapter is in sight,” Situmbeko Musokotwane, the finance minister, said.

But while Zambia has also secured relief on over $6bn in debts owed to official lenders dominated by China, the country still has to negotiate terms with more than $3bn of other private debts. These are mostly owed to Chinese commercial lenders.

Zambia has been under pressure to finalise a restructuring in order to continue a $1.3bn IMF bailout, a need that has become more even urgent as a severe drought this year has hit the country’s public finances further.

“Finalising this agreement with bondholders will create the fiscal breathing space necessary for Zambia to remain on a trajectory of sustainable economic growth,” Musokotwane added.

Kristalina Georgieva, managing director of the IMF, issued a call this month for Zambia’s bondholders to support “rapid completion of the debt operation with high participation”.

The bond restructuring will involve cutting the face value of the old bonds by more than a fifth while pushing out maturity dates and payment relief. 

Bondholders will receive new debt including a bond that will increase payouts in the years ahead if Zambia can outperform economic targets or the IMF judges that it can carry more debt.

Investors are betting that other lengthy sovereign defaults carried over from recent years are closer to being resolved this year, including Ghana and Sri Lanka. 

But the delays have meant many have grown sceptical of a G20-backed process to overhaul debt workouts that was open to poorer countries such as Zambia and Ghana. The Common Framework was meant to improve co-operation between Chinese creditors and western official lenders, but so far has struggled to do so.

“The issue with the Common Framework was that getting everybody into the room meant getting China into the room,” which backfired when China did not participate as planned, one emerging-market debt investor said. “It was well-intentioned, but it was poorly designed.”

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