Ethiopia’s talks with holders of its $1bn defaulted Eurobond broke down on Tuesday, raising the prospect that bondholders may sue for recovery in English courts.
Despite multiple proposals in both directions which appeared close to reaching a deal, Ethiopia and an ad hoc committee of bondholders could not find agreement on the terms of a variable rate instrument that would have been part of a restructuring.
VRIs are bonds in which the debtor’s obligation can increase if its economic conditions improve. In this case the bondholder committee proposed a deal linked to goods exports. The government had accepted the inclusion of a VRI, including in its final proposal.
“[This] would enable holders of the 2024 notes to potentially recoup value based on Ethiopia’s actual capacity to service external debt,” said the committee. However, “Ethiopia and the committee were unable to bridge the remaining gap due to differing perspectives on the VRI.” On Tuesday, the committee said it was mulling “all available options”, including legal action.
Ethiopia’s $1bn 6.625% December 2024 bond is now the only African sovereign Eurobond in default, since Zambia and Ghana completed restructurings in 2024.
The 2024s closed bid at 96 cents on the dollar on Monday, 4.7% higher than the day before talks started, but they started to decline on Tuesday, reaching 94.5 at 4pm London time.
The bond is a small part of Ethiopia’s external debt, which was $28.9bn at the end of June 2024 — 52% of which is owed to multilateral lenders and 28% to bilateral creditors. Domestic debt was $39.9bn-equivalent at the same date. Ethiopia’s prime minister since 2018 has been Abiy Ahmed Ali (pictured).
Ethiopia announced plans to restructure debts under the G20’s Common Framework in February 2021, and defaulted on the bond in December 2023 by missing a coupon payment.
Bondholders have criticised the Ethiopian government for lack of communication. They made a pre-emptive restructuring offer in January 2023, but said the government did not respond until late that year.
Then in August 2024, Ethiopia upset bondholders by proposing a 20% haircut on the principal. The committee accused the government of not acting in good faith, since it believed then as now that “Ethiopia’s debt burden remains a liquidity rather than solvency issue, as supported by Ethiopia’s consistent economic outperformance”.
Bondholders have since offered upfront haircuts of 10% and then 15%. In return, they proposed a VRI, and Ethiopia was open to a deal.
In July 2024, Ethiopia cleared a hurdle to starting talks with creditors when it agreed to a $3.4bn extended fund facility with the International Monetary Fund, which hoped this would provide a framework for Ethiopia to restructure its debt.
The country secured a memorandum of understanding with official creditors in July, which it said offered more than $3.5bn of debt relief.
But, not for the first time in emerging market debt restructuring, the VRI terms proved problematic.
VRIs have been criticised because while a borrower’s economic indicators can improve, that does not necessarily give it a better ability to repay debt.
Ukraine included GDP warrants in its 2015 restructuring, but it did not cap payments and ended up paying more to bondholders than if it had not restructured in the first place.
In Ghana’s Eurobond restructuring talks, bondholders pushed for a VRI, but the government resisted, and won out. Zambia, Sri Lanka and Suriname included VRIs in their debt restructurings.
Zambia’s triggers were debt carrying capacity assessments and the value of dollar exports and revenue; Sri Lanka’s were linked to GDP growth; and Suriname’s based on oil royalties.
Comparability
Ethiopia’s ability to agree terms with Eurobond holders is constrained by the terms of July’s MoU with official bilateral creditors.
That supposedly requires Ethiopia to seek comparability of treatment — a cornerstone of G20 Common Framework debt talks — with other creditors, including bondholders, the committee said.
To address this, the bondholder group offered not only to receive higher payments if Ethiopia outperformed metrics, but less cash if it underperformed. Sri Lanka’s VRI in 2024 was also two way.
One problem for bondholders in restructurings has been that they are not party to the terms of agreements between issuers and official creditors, which makes it difficult to ensure that their proposals achieve comparability of treatment.
This time, the committee said it made “substantial” efforts to align its proposals with its understanding of Ethiopia’s commitments to comparability of treatment. But no deal has emerged.