Zambia Bonds Rally as Barclays Sees Holders Taking 20% Haircut

LUSAKA (Capital Markets in Africa) — Zambia’s Eurobonds surged to their highest since March, when the government signaled it would restructure external debts, after Barclays Plc economists predicted holders might face losses much smaller than reflected in market pricing.

The southern African nation’s $1 billion in notes due 2024 advanced as much as 2.2% to 58 cents on the dollar, extending their gains this month to 8.8%. Zambia became the first African defaulter of the pandemic era when it missed a Eurobond coupon payment in November.

Since then prices for copper, the commodity that Zambia relies on for more than three-quarters of its export earnings, have rallied, and there’s a growing chance Zambia will win support from the International Monetary Fund after August elections, according to Barclays economists including Michael Kafe. That would potentially reduce the haircut for bondholders to about 20%, he said.

Zambia is planning to restructure as much as $12 billion of external borrowings, including $3 billion in Eurobonds and about an equal amount in loans from state-owned Chinese lenders. While the coronavirus pandemic worsened the government’s finances, the nation was already struggling to service its debt and the IMF had been warning it was at high risk of debt distress since at least 2017.

“A debt restructuring involving moderate haircuts still seems necessary to fix fiscal fortunes, but our scenario analysis suggests considerable upside potential for bondholders,” the Barclays economists said in a note Thursday. “We believe that a circa 20% haircut to all of the country’s debt, including Eurobond holders, could be an agreeable level for all parties involved.”

Copper prices that have jumped to near-nine-year highs are giving investors hope, while the government continues to negotiate with the IMF for a loan to prop up foreign-exchange reserves that have plunged to record lows.

Key points from the Barclays note:
Zambia is seen securing a $4.2 billion extended-credit facility from the IMF by next year.
“The IMF may also demand delivery on decisive prior action, given the country’s history of dithering over unpopular reforms during the past half-decade.”
Foreign-exchange reserves that fell to a record low of $1.2 billion in December might dip below $1 billion in 2021.
A 20% haircut on total public external debt is required to push government debt below 80% of GDP by 2025.
Exit yields of about 10% would be realistic for bondholders.

Source: Bloomberg Business News