With a blow out in credit default spreads on Zambia’s dollar bonds maturing 2022, 2024 and 2027 exacerbated by a plummet in copper prices and asset sell-off pressure as COVID19 takes a toll on the South African nation, the Ministry of Finance is faced with a fiscal budget balancing quagmire. Zambia’s currency slide, not only elevates its debt to gross domestic product above 80%, but worsens its debt service burden. It is forecast that the fiscal deficit will widen above the 6.5% budgeted level and 8.33% levels recorded in 2019. Yields on Emerging Market (EM) dollar bonds issued by commodity dependent nations have widened to record highs. Angola, Zambia, Gabon, Mozambique and Nigeria’s eurobonds have blown out significantly especially in the COVID pandemic period when global sentiment has darkened, commodity prices slid and liquidity remains tight. However worth noting is that most jurisdictions had weak fundamentals pre – COVID whose positions has become more feeble with deterioration in the pandemic period.
The year of downgrades. They say the ugliest duckling gets the worst beating, Zambia’s eurobonds continue to lead the EM loss streak chart as investors increasingly get nervous about debt repayment capacity of the copper producer. Let alone Angola, Mozambique, Gabon are in similar quagmires and as though this is not enough rating agencies will be in a downgrade frenzy on the back of increase in fiscal burdens for most emerging market and developed nations this year. South Africa already received the first dosage of credit assessment by Moody’s as it joins the ranks of junk rated nations at ‘BB’ (-ve outlook) from ‘BB+’ while Zambia’s credit rating was trimmed deeper in junk by Moody’s last week. More downgrades are forecast in 2020 than any other year.
Zambia’s bonds are priced at 55.0925% for the 2022’s, 31.3697% for the 2024’s and 42.1474% for the 2027’s. The red metal dollar bonds are the worst performing EM dollar bonds globally.
Energy deficits, rising debt, steep currency weakness and falling base metal prices continue to weigh growth momentum in Africa’s red metal hotspot.
Bond buy-back opportunity. The upside of a blow out in credit spreads is an opportunity for the issuer to ‘buy – back’ their instruments. A rough calculation at the current yields and prices for the $750million Zambia would be needing to buy back its own paper at circa $388million if it decided to do so but a cost of credit risk posture. It is about a dry point of construction that refinance of the maturing paper is a mirage given very weak credit rating that will not allow for affordable pricing. Very few offshores will have appetite for Zambian paper save vulture funds whose aim is usually to arbitrage pricing opportunities.
Suppressed sentiment. With rising risks to growth posed by pandemic risks downgrade risks are very high as rating agencies relish revisiting lowering credit assessment on compounded fiscal strains. Zambia MinFin reach out to the Washington based lender approached an RFP which caused a further fall in dollar bond prices to 35.08/39.16 (2022), 34.85/39.39.15 (2024) and 35.54/39.19 (2027) for bid/offer, which bondholders view as a defacto present valuing of default and distress risk. Fiscal pressure and deteriorating of macroeconomic fundamentals triggered reorganisation of debt by the copper producer. The red metal producer has been in talks with the IMF for 3 years now for a $1.3billion bailout package which seems unlikely and whose chances keep fading on debt sustainability concerns.
Zambia is in talks with multilateral partners for COVID pandemic relief funding.
The Kwacha Arbitrageur
