Zambia’s debt restructuring timeline is ambitious-Stanbic Bank

Standard Bank trading in Zambia as Stanbic Bank says the Zambian government’s proposed timeline for debt restricting may be too ambitious.

According to a note from its Africa Research team, Stanbic says it suspects that negotiations with external creditors and the IMF could potentially be longer than the 6-month period the government intends.

“The Zambian government approached Eurobond creditors along with other commercial lenders for a 6-month interest payment deferral. It appears that the government intends to use this 6-m period to secure an IMF deal as well as conclude restructuring negotiations with all external commercial debt holders,” it said.

“In a recent call with investors, the Zambian government emphasized that it is facing extreme fiscal and external pressures, which are exacerbated by the Covid-19 pandemic.”

“Nonetheless, we still think that the government’s proposed timeline may be too ambitious. Should the government’s request for debt service suspension on all commercial debt be granted, they could save up to USD979m. This includes the USD81m in debt service relief that Zambia received from the G20 Debt Service Suspension Initiative (DSSI).”

It added, “While this may provide much needed short-term relief, Zambia would still remain at an elevated risk of debt distress. Of course, an IMF programme and successful restructuring of external commercial debt within the next 6-m, could improve the external account position and possibly unlock additional foreign financing. This is captured in our bull case, or best case, scenario for Zambia that was published in the Sep edition of our Africa Markets Revealed. Of course, a quick and successful debt restructuring would limit upside pressure on the USD/ZMW.”

The bank has since projected that the Kwacha’s best case scenario will be around 18.1 to a Dollar in the first half of the year.

“Furthermore, the government has highlighted that it intends to treat all external commercial creditors fairly. Media reports indicate that Eurobond holders seem reluctant to be treated junior to other commercial creditors. Although Eurobond investors appear willing to engage in negotiations, some bondholders are seeking more clarity on the composition of Zambia’s external debt stock. After all, despite fiscal distress, the government acknowledged that USD 900m in project loans were disbursed in the 8-m to August.”

“The relevant meetings for each Eurobond will take place on 20 Oct, where quorums have been set at two thirds for the Zambia 22s and 24s, and three quarters for Zambia 27s. Failure to meet quorum, or pass resolution will trigger adjournment to 3 Nov. Should the meetings be adjourned, the deadline for voting for the 3 Nov meetings will be 30 Oct.”

“Critically, the relevant extraordinary resolution to defer interest payments from Oct to Apr 21, must be passed at the relevant meetings for each Eurobond on 20 Oct, or the relevant adjourned meeting. The threshold for passing the relevant extraordinary resolution is a majority of not less than three quarters of the votes cast. If passed, the relevant extraordinary resolution will be binding on all bondholders.“

“At the end of Jun, total public debt reached USD 19.9bn, or 112% of GDP. Domestic debt accounts for USD 5.7bn, with public and publicly guaranteed external debt at USD 14.2bn. Of course, a successful outcome from negotiations with creditors and the IMF hinge on full disclosure of the government’s debt stock, particularly related to the size of publicly guaranteed debt and possibly other contingent liabilities, such as debt contracted by state-owned entities,” it said.

“Recall that the government recently disclosed that public guaranteed and non-guaranteed debt reached USD 2.2bn at the end of Dec19. This includes USD 1.6bn in guarantees, mostly for government energy projects, and USD 600m in non-guaranteed debt for ZESCO. Public debt estimates exclude domestic arrears to private suppliers and government related entities as well as VAT refunds.”