Zambia’s Deal With China and Others Clears Way to Revamp Bonds

Zambia’s deal with a group of creditors led by China and France to restructure $6.3 billion in bilateral debt has cleared the way to an accord، possibly within weeks، over some $3 billion of eurobonds in default for almost three years.

The southern African nation is the first to win major debt relief through the so-called Common Framework that brings together the Paris Club and emerging new lenders، especially China. Private creditors are required to then provide equal relief.

Debt relief 

“I think there are no obstacles anymore،” said Carlos de Sousa، emerging markets debt portfolio manager at Vontobel Asset Management in Zurich. “I don’t see anything standing n the way of getting a deal. Private creditors have been ready for a long time to provide the necessary debt relief.”

Sovereign dollar bonds of 16 emerging markets including Pakistan، Egypt and Bolivia are trading at distressed levels، according to data compiled by Bloomberg. Sri Lanka، Ghana and Belarus have joined the nations defaulting on their debt since Russia’s invasion of Ukraine in February 2022. With limited financing options، further defaults are likely، Fitch Ratings said in a report this week.

The deal that Zambia secured sees it paying back the debt in 20 years، with interest rates as low as 1%. The terms are in line with China’s approach to restructuring that avoids writing off liabilities. Still، there is an about 40% cut in the net present value of the debt، which is what private creditors like bondholders will need to match under the G20’s requirement for comparable treatment.

That level of relief may be possible، given that the Zambian securities are trading at less than 60 cents on the dollar، implying investors expect losses of that magnitude.

“Right now they’re being paid nothing، this is an avenue out،” said Ravi Bhatia، a director at S&P Global Ratings. “They will likely have to be broadly in that ballpark essentially to get a deal and to move forward. The view in the market seems to be that now that the bilateral debt has been agreed، commercial debt can also be discussed and agreed.”

The 40% NPV reduction is lower than the 49% that Zambia last year indicated it was seeking، so is perceived to be a “softening of terms،” according to Yvette Babb، the Hague-based portfolio manager at William Blair Investment Management. 

Upfront Haircuts

Bondholders will probably prefer upfront haircuts to the principal، allowing for shorter maturities and higher interest rates، Zambia’s Treasury Secretary Felix Nkulukusa said in a speech in Lusaka، the capital on Thursday. The nation’s attorney general is reviewing a non-disclosure agreement، which will allow for direct talks with the investors rather than through their advisers.

“So far، we’ve seen a lot of positive feedback from them،” Nkulukusa said. “We were assured that they are willing to come on board probably in weeks not months.”

The deal sets a template

Zambia’s deal has consequences that reach beyond its bondholders. It sets a template for how coordination between China — now the biggest bilateral creditor to developing countries — the Paris Club and bondholders can work. The agreement may mean others that follow could reach quicker conclusions.

“Now when we have future debt restructuring there’s a precedent you can point to،” Bhatia said. “Hopefully in the future، one can move faster.”

Still، debt restructuring are always complex and the Common Framework requires each one to be treated on a case-by-case approach. 

“The hope is that it would lead the way for other countries like Ghana and Ethiopia to reach similar agreements in a speedier way،” Anthony Wong، a Deutsche Bank strategist، said in a note to clients. “Although the Zambia agreement under the Common Framework is a key milestone، it’s unlikely to revolutionize the debt restructuring landscape without some fundamental changes in the process.”