LUSAKA (The Business Telegraph):- It is October 14 and Zambia’s coupon payment on its dollar bond maturing 2024 is due. However, this interest payment matures at a time when the red metal producer is in the labyrinth of deliberations with various creditor classes for possible reprieve in debt service purposes. The Eurobond coupon is important because it is linked to an earlier solicitation request by Zambia’s Ministry of Finance to suspend interest payment for one semi annual cycle – 6 months – to April 14 of 2021. The Southern African nation currently runs a stock of dollar denominated debt totaling $3billion maturing in 2022 ($0.75bn), 2024 ($1.0bn) and 2027 ($1.25bn).
An initial investor presentation by the MinFin on September 29 could not suade bondholders to a successful interest payment stand-off let alone disclosures about engagements with China revealed through a press release posted on the London Stock Exchange – LSE were inadequate to trigger a successful credit event. Bondholders have started to purchase protection for possible default in swaps to hedge their positions.
It appears as though the quagmire is between having to settle arrears owed to China which could dissuade dollar bond holders from a stand off and meeting coupon obligations for Eurobond investors which could in reverse send a wrong signal to the eastern bloc in terms of the copper producers cash flow capacity at this moment. As part of Debt Service Suspension Initiative – DSSI, restructure talks with China with African nations is in progress. However the opaque nature of these deliberations is breeding suspicion on the back of an uneven playing field with other creditors (ex China). This explains the ask from western creditors on the need for transparency adherence in any deliberations involving stand off requests with all creditor types.
Secretary to the Treasury Fredson Yamba in a press release commented:
“Should Zambia fail to reach an agreement with its commercial creditors (including holders of its Eurobonds) on the terms of the appropriate standstills, as previously stated, the Republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulating arrears.“
“The debt service suspension period that the Government is requesting will allow us to work, with the assistance of our financial and legal advisors, and in cooperation with the IMF, and all our creditors including the note holders and their Ad-hoc committee, to design a sustainable and equitable debt management strategy. Our common objective will be to normalize our relationship with our valued financial partners as soon as circumstances allow and to orderly address Zambia’s debt challenges. We remain committed to ensuring equitable treatment of all our creditors and ensuring transparency in our engagements.”
“Should the note holders consent to the standstill, we will recognize interest accruing on deferred coupons in the restructuring process, at a rate to be determined in good faith with note holders.”
Zambia in June this year hired Lazard Frere’s a French investment banking firm to restructure its debt in a move aimed at bringing sustainability to the red metal producers fiscal posture. At the presentation to investors, MinFin head Dr. Bwalya Ng’andu revealed that total indebtedness inclusive of debt guarantees by government for state owned entities was $18.5billion which have ballooned Zambia’s debt to GDP to 104% breaching the 35% Washington based lenders threshold.
The increased Transfer and Convertibility risks which the copper producer faces coupled with the potential default risks could weigh credit appetite for financial institutions to impact the forecast ‘V’ shaped recovery for 2021. The credit event about to happen could impact International Financial Reporting Standards – No.9 provisioning models through higher impairments while market variables are forecast to weigh business fabric through further currency depreciation and widening interest rates. Capital controls in such desperate times have historical been likely to curb capital flight.
The Kwacha Arbitrageur
