The $3 billion bond revamp deal in Zambia has the IMF wary

 The $3 billion bond revamp deal in Zambia has the IMF wary

The Finance Ministry claimed that the International Monetary Fund and Zambia's official creditors had voiced concerns over a proposed agreement to restructure $3 billion in eurobonds that the government had announced last month. The country's currency and bonds fell precipitously.

The ministry said in a statement on Friday that talks between the government and the bondholders' steering committee are still ongoing, although it did not specify what concerns it had. According to Samir Gadio, a Standard Chartered Bank specialist who monitors African financial markets, the worries are probably mostly because of Zambia's planned 2035 bond's front-loaded amortization and starting coupon levels.

The $1.25 billion in bonds due in Zambia were among the worst-performing in a Bloomberg-monitored index of government credit from developing and frontier markets. By 3:49 pm local time, they had dropped 1.4%, the highest since October 3rd, to 63.237 cents on the dollar. The value of the kwacha fell 0.4% vs the US dollar to a record low of 22.805.

The IMF and official creditors, headed by China and France, are concerned, which adds credence to the argument made by activists like Debt Justice, headquartered in the UK, that bondholders received an unfairly favorable deal. Zambia and its official creditors have already decided to restructure $6.3 billion.

The government may need to seek further relief from investors holding its dollar notes due to the concerns brought up by the IMF and the official creditor committee. This might imply that negotiations will take longer than expected to conclude. The administration said last month that it wanted to finish the agreement before the end of the year.

In a post on October 27, Brad Setser, a senior member at the Council on Foreign Relations, said that bondholders would get an upfront incentive and amortization payments totaling around $550 million through 2025 under the proposed agreement on X, previously Twitter.

The bond holder settlement unfairly accelerates a large portion of amortization payments over the 2027 date. A great deal. Due to the fact that the cash participation incentive and amortization are paid in advance, the stock price decreases by about $550 million until 2025.

Brad Setser, on Twitter: @Brad_Setser 27 October 2023

Eric Lautier, the resident representative of the Washington-based lender in Zambia, did not immediately reply to an email seeking comment. The Finance Ministry of Zambia refuses to speak more.

The formal creditors of Zambia agreed to a 40% decrease in the debt's present value. According to Debt Justice, the decrease under the bondholders' agreement is 33%.

Even though they initially lent money at higher interest rates, bondholders will receive a third more repayment than government creditors, such as China and the UK, under the restructuring agreement reached with Zambia, according to a statement released on Friday by Debt Justice and the Zambian Civil Society Debt Alliance, a local coalition of activists.

According to Debt Justice's calculations, bondholders will essentially get 73 cents in repayment for every $1 initially loaned under the terms of the agreement. It said that the government would essentially get back 55 cents for every $1.

Zambia, which became Africa's first pandemic-era defaulter in 2020, is restructuring its debt using the Group of 20's Common Framework mechanism.

The G20 Common Framework requires private creditors to provide "at least as favorable" restructuring parameters as government lenders. Debt Justice said that the contract does not comply with this criteria due to the unequal treatment of private and government creditors.