Fitch Ratings has downgraded Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘C’ from ‘CC’.
Fitch has also downgraded the ratings on Zambia’s senior unsecured foreign-currency bonds included in the “consent solicitation” to ‘C’ from ‘CC’.
This includes all of the foreign-currency bonds rated by Fitch.
Fitch typically does not assign Outlooks or apply modifiers for sovereigns with a rating of ‘CCC’ or below.
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.
“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,” it said in a statement.
The government has indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached.
Fitch however judges that there is a high risk of a missed debt payment over the forecast horizon.
“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.