Fitch Downgrades Zambia Ahead Of Budget

International ratings agency Fitch on Thursday announced a downgrade of Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'C' from 'CC' in expectation of a sovereign default on debt.  

Fitch previously downgraded Zambia’s rating from ‘CCC’ to ‘CC’ in April of this year. 

The downgrade comes after government this week asked investors for relief and the suspension of debt service payments for a period of six months. It has asked bondholders with around $3 billion in international bonds (the Eurobonds) to meet next month to approve the deferral of interest payments amounting to almost $120 million until April 2021. In doing so it is the first African country to ask bondholders for relief during the coronavirus pandemic. 

“The downgrade reflects Fitch's view that a sovereign default will follow the "consent solicitation" issued by the Zambian government on suspending debt service payments on its three outstanding global bonds. A suspension in payments, if agreed to by bondholders, would constitute a distressed debt exchange (DDE) in Fitch's view. The authorities have indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. However, Fitch judges that there is a high risk of a missed debt payment over the forecast horizon,” the organisation stated. 

“On 22 September, the government of Zambia issued a "consent solicitation" to holders of three global bonds, requesting a suspension of debt service payments for six months from 14 October 2020, effectively covering the upcoming three coupon payments due on 14 October 2020, 30 January 2021, and 20 March 2021 on the respective bonds,” it explained. 

“Fitch deems this formal request to be the initiation of a default-like process, consistent with a 'C' rating. Should majorities of creditors agree to the request at the thresholds specified in collective action clauses, the payment standstill would constitute a DDE under Fitch's criteria given that it entails a material reduction in terms and is needed to avoid an outright default,” Fitch advised. 

“The sovereign's already constrained external liquidity was exacerbated by the shock from the coronavirus pandemic. Fitch downgraded Zambia's rating to 'CC' on 16 April to indicate the increasing likelihood of a default event as a result of these pressures,” the organization concluded. 

The downgrade comes ahead of the presentation of the 2021 budget by Minister of Finance Dr Bwalya Ng’andu on Friday.