Zambia Eurobonds Extend Losses as Country Flags Restructure

HARARE (Capital Markets in Africa) — Zambia’s Eurobonds extended losses on Wednesday and its currency tumbled to a record low after Africa’s second-biggest copper producer asked banks for proposals on reorganizing as much as $11.2 billion of foreign debt.

The country “intends to implement a liability management of its external debt portfolio to lengthen maturity and enhance its capacity to meet debt-service obligations,” the finance ministry said in a request for proposals sent to lenders, seen by Bloomberg and verified by two of the recipients.

The advisers’ mandate would include assisting the government in negotiations with creditors, as well as “formulating restructuring plans for loans” where creditors agree, according to the document. Yields on Eurobonds surged to fresh highs and the kwacha weakened for a 10th straight day.

Zambia’s currency is the world’s worst performer this year, and foreign-exchange reserves have fallen to a record low and cover less than two months of imports. Credit rating companies including Fitch Ratings had already warned of a high risk of default even before copper prices fell 20% this year as the coronavirus pandemic roils markets.

The southern African nation’s $3 billion of Eurobonds have been trading at distressed levels. The debt is held mostly by European and U.S. investors, with BlackRock Inc., NN Group NV and Ashmore Group Plc among the biggest holders.

“They’re in a situation where they’re going to need assistance,” Yvonne Mhango, an economist with Rencap Securities Pty Ltd. in Johannesburg, said by phone Wednesday. “It’s a commodity exporter and you essentially have a global demand shock. The market is reading that and they know Zambia already has really low foreign exchange reserves.”

The yield on $1.25 billion of securities due July 2027 jumped 89 basis points to 34.49% by 11:29 a.m. in London as the price fell to 33.12 cents on the dollar. The yield on the shortest-dated bonds due 2022 soared 14.74 percentage points to 66.32%. The kwacha slumped 1.5% to 18.45 per dollar.

The request for proposals is part of Zambia’s plan to put in place measures to ensure debt sustainability and deal with liabilities that will become due in the medium term, Chileshe Kandeta, the Finance Ministry spokesman, said in an emailed response to questions.

‘Respect Agreements’
The document was sent to lenders including Barclays Plc, Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group Inc. The ministry also sent it to Greylock Capital Management LLC, an investor in emerging-market distressed debt.

“The government has no intention of unilaterally restructuring its debt without consulting creditors,” Kandeta said. “The government will respect agreements and use market-based instruments where applicable.”

Any restructuring plan will include debt held by multilateral and bilateral lenders, commercial banks, capital-market investors export-credit organizations and others, the document said.
The move could improve the chances of International Monetary Fund support, but has made bondholders more anxious, Citigroup Global Markets analysts Sara Felizardo and Luis Costa said in an emailed note.

“At the same time, a high share of external debt is related with China,” they said. “This means that Chinese debt needs to be involved in order to provide a substantial debt service capacity.”

The country has been seeking support from the IMF since at least 2014, and Finance Minister Bwalya Ng’andu reiterated his nation’s intentions last month.
“They were very clear that one of the things they want to see before we can get down to a program is we exhibit debt sustainability,” he had said of a meeting with fund staff. “I think what they were looking for was some indication from us beginning to take measures that point to the right direction.”

Coronavirus Funding
Zambia also plans to apply for emergency financing from lenders such as the IMF to help respond to the coronavirus pandemic, Ng’andu said March 27.

The selected advisers will “review the entire debt-loan portfolio to identify loans that are plausible for liability management,” according to the request for proposals. They will also “formulate restructuring plans for loans where liability management terms have been agreed to by creditors,” and help arrange to finance, it said.

Zambia debuted in the Eurobond market in 2012 when low-interest rates in the wake of the global recession and the ensuing hunt for yield among investors meant it could borrow more cheaply than Spain at the time. Two other Eurobond sales followed in 2014 and 2015.

It’s also contracted billions of dollars in loans for infrastructure projects from lenders including Export-Import Bank of China, Industrial and Commercial Bank of China and Saudi Fund for Development.

Source: Bloomberg Business News