Faced with Liquidity Constraints, Zambia Seeks Covid-induced Bond Bailout

Lillian Jijingi

Zambia became the first African country to ask bondholders for relief since the onset of the coronavirus, seeking to defer interest payments on its Eurobonds as it battles the economic effects the pandemic.

The southern African nation asked for meetings on October 20 with the holders of three Eurobonds totaling $3 billion, to seek consent for a standstill until April next year, to create “breathing space” as it plans a debt restructuring.

Zambia’s $1 billion of notes due 2024 fell more than 5% in London to 52.12 cents on the dollar, after the government said a coupon payment due October 14 would be included in the proposed suspension.

“Zambia is currently faced with unprecedented liquidity constraints that have been exacerbated by the Covid-19 pandemic, resulting in a substantial decline in revenues,” the government said in an emailed statement Tuesday.

“A combination of declining revenues and increased unbudgeted costs caused by the Covid-19 pandemic have resulted in a material impact on the government’s available resources to make timely payments on its indebtedness, leading to increasing debt servicing difficulties.”

The pandemic has worsened Zambia’s finances, which were already straining after years of overspending funded in part by external borrowing. The currency of Africa’s second-biggest copper producer is the world’s worst performer this year, making payments on its $11.7 billion in external debt even more costly after foreign reserves slid to record lows.

The Zambian government said it hopes its restructuring plans will win support from the International Monetary Fund.

The government had last month secured a debt-suspension deal up to the end of the year from some official creditors. As part of this accord, Zambia was also obliged to seek comparable terms with commercial lenders, according to Mukuli Chikuba, permanent secretary at the finance ministry.

Asking for a suspension of interest payments doesn’t amount to default, he said, adding that the government met a coupon payment earlier this month.

“What we are getting into is not a default per se, but consensus-building,” Chikuba said by phone. The government, which hired Lazard Freres earlier this year for advice on its debt strategy, will outline a set of proposals to bondholders on September 29, he said.

Under Zambia’s interest-holiday request, it will pay bondholders $0.50 per $1,000 in bond principal they hold if the coupon-payment suspensions are approved.

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