Milestone Reached in Debt Restructuring Talks: Zambia Agrees Deal with Bondholders

On Thursday 26 October Zambia reached agreement on restructuring $3 billion of international bonds with key creditors. This step comes as a huge milestone in Zambia’s debt restructure process.

The claims on three outstanding bonds are to be restructured through two fresh “amortising” bonds. This would entail repayments going towards interest and principal, which would mature in 2035 and 2053 respectively.

The new bonds would hold a value of $3.135 billion in both scenarios, exceeding the original $3 billion value of the old notes, and the deal would provide $2.5 billion in cash-flow relief during the country's $1.3 billion IMF programme that expires in 2025.

Zambia became the first African nation to default on its debt in 2020. The restructuring process has been beset by delays, not least by a global pandemic. Over the last few months, however, crucial milestones have been reached, with Thursday’s deal marking another successful step.

Finance Minister Situmbeko Musokotwane announced that the agreement “paves the way for similar restructuring agreements with our other private creditors.”

"We hope for the swift implementation of this agreement in principle by the end of the year," he said.

After the announcement, Zambia’s three international bonds rose significantly, increasing by 3.9 cents on the dollar, as shown by Tradeweb and MarketAxess data. The 2024 and 2027 bonds were bid at around the mark of 60 cents in the dollar.

The Zambia External Bondholder Steering Committee welcomed the agreement, saying it would "restore full international capital markets access to Zambia and encourage long-term investment in the country."

In the long-term, the deal will allow for better and quicker payouts to bondholders, especially if the economy performs well during the observation period between January 2026 and December 2028.

A rise in the composite indicator would signal higher debt carrying capacities, or that hard-currency revenues would exceed IMF projections on a three-year rolling average. Either case would trigger better and faster pay-outs.

Under either of the deal’s economic scenarios, the $2 billion 2035 bond will amortise from 2023 onwards, whilst paying a 5.75% coupon until September 2031 and then 8% until maturity.

The second $1.135 billion bond will amortise in three equal instalments paid in 2051, 2052 and 2053 and a 0.5% coupon in the “base case” scenario. In an "upside case" the maturity would occur much earlier in 2035, with amortisation from 2032 onwards, whilst interest payments will step up three times.

This is the first time a "step-up" bond has been used in sovereign debt restructurings. Similar instruments could offer options in future debt relief processes. The inclusion in major fixed income indexes generally boosts liquidity of an instrument.

Moving forward, the government needs to put the agreement to a bondholders’ vote, an “exchange offer”, which should place by the third week of November, according to the statement, as initial amortisation payments begin in December.

Members of its steering committee, which takes the lead on any negotiations, are Amia Capital LLP, Amundi, RBC BlueBay Asset Management, Farallon Capital Management and Greylock Capital Management, according to the bondholder committee’s statement.

Earlier this month, Zambia also agreed a Memorandum of Understanding (MoU) with its official creditors, including China and other members of the Paris Club of creditor nations, to restructure about $6.3 billion of debt.