Fitch Ratings Insight - Debt Restructuring in Zambia

Zambia’s Agreement with Eurobond Holders Points to Path Out of Default - "The formal launch of the debt exchange is planned for the third week of November."

03 NOVEMBER 2023

The below article snippet originally appeared as a post on the Fitch Wire credit market commentary page. The full original article can be accessed at Fitch Ratings All opinions expressed are those of Fitch Ratings.

Fitch Ratings-Hong Kong-03 November 2023: The announcement of an agreement between the Zambian government and representatives of the country’s Eurobond holders is a positive development that could help Zambia to move out of default, says Fitch Ratings. Nevertheless, there are still potential hurdles that could impede a successful debt exchange.

Once Zambia has reached an agreement with creditors on restructuring its Eurobonds and we assess that it has completed that restructuring process, we would move its Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) out of ‘Restricted Default’ (RD) and assign a rating based on a forward-looking assessment of the sovereign's willingness and capacity to honour its foreign-currency debt obligations. We affirmed Zambia’s Long-Term Local-Currency IDR at ‘CCC’ in December 2022.

The agreement between the steering committee of the ad hoc creditor committee of Eurobond holders for the three Eurobonds maturing in 2022, 2024 and 2027 brings this restructuring a step closer.

The proposed debt exchange entails an 18% haircut to bondholders’ current notional claims of just over USD3.8 billion. As with the June agreement with the Official Creditor Committee (OCC), the deal includes a contingency element offering benefits to creditors. The remaining claims are restructured into two bonds, one of which has a step-up in payments and an earlier maturity under an upside case. The IMF confirmed in July that implementing the OCC agreement and a comparable agreement with private creditors would enable Zambia’s debt to be assessed as sustainable, with a moderate risk of debt distress over the medium term, under both the baseline and upside scenarios."

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"Progress towards a debt exchange could still be interrupted if the deal reached with the steering committee fails to secure sufficient support among wider Eurobond holders. According to authorities, members of the steering committee currently own or control approximately 18% of the outstanding bonds, and the broader ad hoc committee more than 40%. However, the Eurobonds maturing in 2022 and 2024 do not contain collective action clauses that ease an orderly debt restructuring by reducing the influence of holdout creditors. The formal launch of the debt exchange is planned for the third week of November."

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