Africa’s second largest copper hotspot, Zambia, sold K5.2bln ($286mln equivalent) worth of pandemic bonds on Friday 26 June. Proceeds will be used to dismantle part of the outstanding arrears to retirees, suppliers and contractors. Earlier in the week begining 22 June, Zambian authorities approved an K8bln stimulus package to be administered through issuance of COVID19 bonds whose proceeds would be used to absorb bills owed to retirees, contractors and suppliers.
DOMESTIC DEBT RESTRUCTURE, BOND REPURCHASE AND COVID FUNDING
The bond issuance issuance was motivated by the Finance Ministry’s funding needs to absorb pandemic related amplified shocks to the economy and the need to re-inject liquidity back into the real sector of the economy which the central bank used to consolidate its bond inventory. Bank of Zambia – BOZ has issued a wide inventory of bonds which it sought to consolidate so as to improve their liquidity profile.
Bond Buy Back Program. This structure provides a platform for local debt restructure as the BOZ bought back shorter dated bonds in the 2 and 5 year from market players whose liquidity was then housed on longer dated 10 and 15 year bonds of K5.2bln nominal value. Zambia’s domestic arrears were last reported at K26.3bln of which the K5.2bln issuance addresses dismantling of 19.8% of liquidity that the real sector of the economy has been deprived of. The restructure of maturity profile of bonds through lengthened duration is a positive for Zambia’s MinFin at such a time as this very similar to what external debt restructure by Lazard will aim to achieve.
Off Market but priced at Market. The COVID bonds were issued at market yields of 31.5% and 32.5% in the 10 and 15 year duration tenors, addressing pricing distortions especially that this was a private placement (off market). We believe the longer dated tenors were the key pandemic bond issuance tenors which align with pension funds and money managers appetite for their asset liability profiles.
Central bank claims to government in outstanding bills, bonds and loans have widened 77.2% in the first half of the year to K16.3bln a reflection of rising funding needs to the fiscal side.
The Kwacha Arbitrageur and Cynical Investor
