Zambia’s dollar debt plunged after official creditors co-led by China and France rejected a revised restructuring proposal, stalling the revamp of $3 billion of outstanding Eurobonds.
The development, which calls into question a Group of 20 plan to help poor countries overhaul unsustainable loans, comes after Zambia last month reached a memorandum of understanding with official creditors to restructure $6.3 billion of debt.
It needed to receive at least as favorable treatment from private creditors under the G20’s Common Framework guidelines. The southern African nation agreed on revised terms with bondholders after the official creditors and the International Monetary Fund rejected an initial deal earlier this month.
A bondholder steering committee said Monday it can’t provide further relief, and was already giving Zambia more than the official creditors.
That throws into question not only Zambia’s restructuring, but the Common Framework itself, evidenced by the plunge in the dollar bonds of Ghana, which is also using the mechanism as a template to overhaul its debt. It underscores how complex it is for poor countries to reach restructuring deals with creditors ranging from Chinese lenders to bondholders.
The OCC rejection of the revised deal will “completely undermine the already diminishing credibility of the Common Framework,” the steering committee of bondholders said. “It is not for official bilateral creditors to dictate debt terms to other creditors in circumstances where the government has confirmed comparability of treatment.”
Zambia’s $1.25 billion of notes due 2027 fell as much as 4.6% — the most in more than a year — and were trading at 59.6 cents on the dollar by 9:53 am in London. Its currency fell 0.4% against the dollar to a record-low 23.175. Its economy has been struggling since it became Africa’s first pandemic era sovereign defaulter in 2020.
Zambia’s official creditor committee said the rejigged deal the government reached with bondholders still doesn’t offer comparable terms to the restructuring agreement struck last month for $6.3 billion off bilateral debt, the Ministry of Finance and National Planning said in a statement.
The rejection of the agreement by official creditors came even as the IMF, which had expressed reservations about the initial deal, said the revised version was compatible with Zambia’s program with the Washington-based lender, according to the ministry.
A key stumbling block is that bondholders agreed to upfront losses — or haircuts — to the total debt owed, in return for being repaid a higher proportion of the remaining debt earlier than official creditors. That’s not considered a mitigating factor since the haircut is not part of the criteria listed in the G20 Common Framework to assess comparability of treatment, the ministry said.
“This is a very disappointing outcome when both the Zambian government and bondholders believed that they had negotiated a restructuring that complied with the Common Framework and was in line with the OCC agreement,” said Anthony Simond, emerging-market debt investment director at Abrdn, which holds Zambian notes and is part of the bondholder committee. “It seems that a principal haircut is not used as part of the comparability of treatment exercise and this is a key sticking point, but one which surely will be resolved.”
The bondholder group said there was no consensus among the official creditor committee members on what’s needed to deem their deal as comparable.
The next phase of negotiations will be largely diplomatic with potentially both the government and the IMF pressing for a softening of the OCC position or a modest revision to the bondholder proposal, according to Connor Vasey, an analyst with Eurasia Group.