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Zambia strikes preliminary deal on $3bn international bond rework

Southern African nation defaulted on debt three years ago

(Reuters) – Zambia said on Monday it had reached agreement with a group of private creditors on restructuring $3 billion of its international bonds in a major step that brings the country closer to emerging from its long-delayed debt rework.

The latest deal proposes swapping Zambia's three existing instruments into two amortising bonds, one of which would deliver higher repayments if the country's economic outlook and capability of dealing with its debt burden improve.

"History has been made!," President Hakainde Hichilema said on social media platform X. "We are pleased to announce the agreement with our Eurobond holders."

Zambia defaulted more than three years ago and is reworking its debt under the Common Framework, a G20 platform to bring together big creditors like China and the traditional group of developed creditor nations, known as the Paris Club, to ensure swift and smooth debt overhauls for low-income countries. Zambia is seen as a test case.

But the process has been beset by long delays, which have hamstrung much needed investments, curtailed economic growth and weighed on local financial markets.

The situation has worsened amid a devastating drought that has been declared a national disaster and which affects hydropower generation and food production.

Zambia secured a $1.3 billion loan from the International Monetary Fund in 2022, which required it to restructure its debt with other creditors.

That confirms what many of Faye's supporters had already been celebrating as results began trickling in on Sunday evening.

The southern African country's sovereign bonds rose after the agreement was announced, with the 2027 note up 1.8 cents to 73.85 cents on the dollar.

CHANGES IN SUBSTANCE

Monday's proposal is in structure much like a preliminary deal that was reached late last year, but was then derailed after being rejected by official creditors, which include countries such as China and France.

However, there are some changes in substance.

While the overall claim that bondholders have against the country grew to $3.98 billion due to accumulated unpaid interest, under the new deal investors will receive bonds with a face value of $3.05 billion - a reduction from the $3.135 billion proposed in October.

Under the agreement, bondholders would forego approximately $840 million of their claims, the statement said, compared to $700 million in the previous proposal. Cash flow relief remained the same at around $2.5 billion during the IMF programme period.

The government also said in the announcement it had received confirmation from official creditors that the agreed terms were compatible with regards to so-called "comparability of treatment", designed to ensure outsized concessions are not made by an official creditor group compared to non-members and private lenders.

Zambia made its latest proposal to the bondholder group with terms that had been "pre-approved" by official creditors, a source familiar with the bondholder group's thinking told Reuters.

"Over the past 2-3 weeks, there's been some tweaking and amendments to that, to reach a resolution that the OCC (Official Creditor Committee) has also confirmed meets their interpretation of comparability of treatment," they said, adding that comparability was "something on which both sides had to compromise".

An IMF spokesperson said via email the "agreement is consistent with the parameters of the IMF programme." Bondholders also welcomed the agreement in a separate emailed statement.

"We are pleased to have finally reached a definitive and conclusive agreement with the Government that is supported by all stakeholders," said the group of private creditors, which include Amia Capital, Amundi, Farallon, Greylock Capital Management, and BlueBay Asset Management.

The government said it will ensure that "certain other creditors do not receive a better recovery in the restructuring on net present value terms" and also a loss reinstatement clause if Zambia were to default during the term of the existing International Monetary Fund programme, the statement added.

The Paris Club, which is staffed by French Treasury officials and acts as a secretariat for wealthy creditor nations, did not immediately respond to a request for comment.  

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