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Covid to claim first African sovereign casualty as fears rise of Zambia default

Zambia looks set to be Africa’s first sovereign to default due to the coronavirus crisis. This already complex situation could be being made even more complicated by China — a big bilateral lender to Zambia.

Zambia risks becoming the first African country to default since the pandemic started, as its bondholders are not convinced by the government’s negotiations with the International Monetary Fund and say they have not been given enough information about how the sovereign will approach its debt obligations to China.

Zambia’s consent solicitation request to its bondholders last month, asking them to defer coupon payments on $3bn of its Eurobonds, took many by surprise. Sources near the external bondholder committee, which holds around 40% of Zambia’s Eurobonds, said there was absolutely no engagement by the government before the request was made.

Now sources near the matter say Zambia will struggle to get the solicitation request approved. GlobalMarkets understands that the committee has chosen to abstain from the investor vote, which has a deadline of October 18.

“It’s now widely accepted that Zambia will struggle to get the consent solicitation approved,” said Richard Briggs, investment manager at GAM, which has exposure to Zambian debt. “Bondholders are asking them to engage more and provide more detail on how exactly they plan on restructuring or reprofiling the debt. Investors are in a limbo at the moment — the ball is in Zambia’s court.” 

If the solicitation request is rejected, Zambia risks being the first African sovereign to default since the coronavirus crisis began. However, some say that if that is the case, the sovereign may scramble to find the cash for the coupon payment it will need to make to avoid a hard default.

Bondholders fear that any form of debt relief may open the way for Zambia to continue honouring payment to Chinese creditors, who according to experts, hold a third of Zambia’s debt. Bondholders are keen to know how Zambia is approaching negotiations with China in the interests of achieving “intercreditor equity”.

“Zambia has not given detail on what they intend to do with Chinese creditors, who appear to be asking for arrears to be paid in order for existing debt to be suspended. I cannot see other creditors, especially bondholders, being OK with that,” said Briggs.

China puzzle

Since the pandemic started, the official sector has put pressure on private creditors, including bondholders, to grant the world’s poorest countries debt relief. While the IMF, for example, has provided debt relief to 29 of the world’s poorest countries, 22 of which are in Sub-Saharan Africa, the response from private creditors has been more nuanced.

China has said it is conducting debt relief negotiations with its Sub-Saharan Africa recipients, including Zambia, on a case-by-case basis. But some remain critical of China’s position.

“China is an important aspect of the problem,” says Charlie Robertson, global chief economist at Renaissance Capital. “Zambia’s Eurobond holders do not want to bail out China, which has historically received double digit returns on Zambian debt through charging interest and making the funds conditional on Chinese companies being hired for infrastructure projects.

“On average, China is making a return of around 20% a year, while investors in Zambia’s 2024 bonds are only making around 8.5%.”

Similarly, Zambia’s tenuous relationship with the IMF has posed a challenge for bondholders, who say it would be easier to accept the solicitation request if Zambia had a programme with the fund in place.