In the labyrinth of uncertainty lies silver linings for Africa’s second largest copper producer Zambia as every second that ticks gets it closer to the bondholders vote. Earlier in September, the Zambian government sent out a solicitation request to dollar bond holders seeking a 6-months suspension on coupon payment to run to 14 April 2021 for sums totalling $160million. It is evident that COVID has amplified, already existing fiscal fragilities that has triggered talks between African fiscal heads with almost all creditor classes for reprieve as they journey to claw back eroded growth and balance fiscal obligations to avert default risks. Zambia presented to investors on 29 September at which the countries total obligations were revealed as $18.5billion collating external, domestic debt inclusive of State Owned Entity obligations. Debt to GDP in the red metal producer has widened to 104% exceeding the IMF acceptable threshold of 35%.
A fading tag of war as reprieve from the east trickles in stoppish time
It’s a tag of war quagmire between servicing what is owed to the east (China) and the west representing bondholders who are currently thinking about whether or not to accept Zambia’s solicitation request for coupon payment freeze. The press release shared on the London Stock Exchange – LSE revealed arrears in excess of $485million (June2020) and that Zambia has a yard of obligations falling due with China in 2020 – 2021. With the vote earlier scheduled for 16 October, quorum could not be met hence the extension to 14 November, a ‘life – line’ that bondholders gave Zambia. In stoppish time these life line period, Zambia was by China Development Bank granted debt deferment to 25 April 2021 the second announcement coming from the east around debt reprieve discussions. This reprieve action is evidence that negotiations with China are bearing fruit and that there is likelihood that more commercial creditors will in the next two weeks agree to defer Zambia’s obligations which will be a game changer for the red metal producer.
Zambia was earlier in the year granted reprieve on interest payments on its Paris Club debt nodded by the G20 from 01 May to 31 December. The copper producer is still exploring the same G20 card for more debt suspension with China.
IMF appoints Zambia Rep Preya Sharma
Appointment of a resident representative Preya Sharma couldn’t have come at a better time following 2 years of a vacant role in Zambia after Alfredo Baldini relocated to the US. In the last week of June it was revealed that the IMF was now mandated to hold economic bail out talks with Zambia. Appointment of a resident representative sends another positive signal that there is some will for a program, as the Southern African nation takes steps to restore fiscal fitness, which when viewed in parallel with the ongoing debt structure process by Lazard financial advisors, does echo fiscal rehabilitation.
Read: Preya Sharma named Zambia’s IMF resident rep
The bondholders committee press release revealed that investors were concerned about Zambia’s status on deliberations with the IMF in addition to transparency about negotiation with Chinese creditors. All seems to be falling in place but for one factor, time. Six month time frame may not be adequate but is nonetheless a good starting point for negotiations. These steps could be key determinants of bondholders voting posture on the 14 November.
S&P downgrades to ‘SD’ while Moody’s sticks to ‘Ca’
Despite Standards and Poor’s lowering Zambia’s credit assessment to Selective Default – SD from CCC-, Moody’s investor services reaffirmed its April 2020 rating of ‘Ca’. This was on the face of it against all odds especially that most analysts expect an alignment to S&P rating. There is a likelihood that Zambia could absorb the $42.5million coupon payment inferring from central bank activity over the period which could signal amassing dollars, a potential tactic to kick the can down the road to the 13 November when the 30 days grace period expires. Suffice to say when the bondholders say no to a standoff, the MinFin could likely absorb the coupon obligation while a yes assuming quorum is met will be a positive still as the copper producer will earn reprieve.
Copper prices have started to levitate as the red metal has rallied over 50% to current levels of $6,877 a metric ton after hitting a 2 year high on 21 October of $7,000 a metric ton against the odds. A healthy copper given the higher than previous years copper production signals a stronger tax revenue base for Zambia in these economic turbulent times. The International Copper study Group – ICSG forecasts a 52,000 metric ton copper deficit in 2021 from an earlier 280,000 metric ton surplus.
The Kwacha Arbitrageur