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Does Zambia’s bondholder deal mean it has resolved its default?

COPPER producer Zambia is on the cusp of moving on from its debt default after a nearly four-year-long process. Along with Sri Lanka and Ghana, the southern African nation fell into debt distress and then defaulted during the COVID-19 pandemic.

Does its deal with bondholders mean its economy is back on track, or that it is now out of default?

WHAT HAPPENS WITH THE DEFAULTED DEBT?

When a country defaults, it must negotiate new terms that all lenders will accept that will make repaying manageable again. This can happen by cutting the outright amount of debt, reducing the interest paid, stretching the repayment timeframe – or some combination of all of those. Zambia already has deals with its official lenders – ie other countries – making the deal with those holding its three Eurobonds the last stage.

WHAT HAPPENS NEXT?

The moment bondholders – often the last set of lenders to negotiate – reach a deal, lawyers get to work. They create the scaffolding that transforms the agreement into tradeable bonds.

At this point, the International Monetary Fund – the lender of last resort to the country in default – and official creditors ought to have signed off on the deal. In theory, the drafting is straightforward.

“The sort of known things that can go wrong I think they’re very limited in the sovereign world. It’s as near a done thing as it possible can be,” said Andrew Wilkinson, senior restructuring partner with law firm Weil Gotshal.

Simultaneously, another company will gather contact information on bondholders, from major pension funds to retail investors, so lawyers can present the deal for approval.

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It will go to bondholders either as brand new bonds – an “exchange offer” – or as amendments to the bonds they already hold – a “consent solicitation.”

Next, bondholders must vote.

HOW LONG DOES IT TAKE?

The entire process ranges from weeks to as long as six months. Wilkinson and most investors expect Zambia’s deal to go to bondholders soon with the conclusion by June.

The speed of drafting the legal language depends on the level of detail the negotiators included in the original deal.

Sometimes aspects can still be controversial, particularly “non-financial clauses” that range from what investors get if the country defaults again to what happens to bond terms if the economy strengthens.

Wilkinson said most deals, including Zambia’s, include enough detail to prevent these clauses from scuppering the process.

But Theo Maret, associate with Global Sovereign Advisory, which advises governments on economic issues, said there can be “highly political” disagreements.

“Beyond the financial terms, you have a lot of stuff that can be a matter of disagreement … and that can take some time.”

It took roughly six months to launch new bonds in Suriname, in part because of clauses around aspects such as money going to the country’s sovereign wealth fund.

Getting bondholders to sign off adds another month, roughly, assuming they approve. Afterwards, the bonds can be traded within days or a couple of weeks.

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CAN IT GO WRONG?

It’s rare – but not impossible.

Serial defaulter Argentina once tried to exchange bonds without much consultation, and bondholders rejected them.

In cases where a so-called “ad hoc” bondholder group owns most bonds, it is an easy sell. In Zambia, that group controls around a third of outstanding bonds.

If that’s not the case, the government must make sure that other bondholders understand the deal and are on board. Sri Lanka has hired banks to help make its case, others can even go on a roadshow.

Collective action clauses, nowadays present in nearly all contracts, force holdouts to accept a deal as long as a certain percentage approve, making rejections less likely.

“So the scope to achieve something through trying to hold up a sovereign deal is extremely limited,” Wilkinson said. “You can’t get an alternative restructuring off the ground.”

DOES IT MATTER?

Countries in default face extremely limited borrowing options – with enormous ramifications for their economies and citizens. Most countries constantly seek money to fund big projects and everyday budgets.

For bondholders, meanwhile, they can start getting coupon payments again on debt that will be easier to trade.

“You have a restructured, performing instrument – a cash-paying performing instrument,” Wilkinson said.

Once bondholders approve a final deal, and the new bonds go live, ratings agencies consider the default resolved, said Roberto Sifon-Arevalo, managing director at S&P.

WHEN CAN YOU BORROW FRESH MONEY AGAIN?

In theory, once a default is resolved, a country can return to capital markets.

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Sifon-Arevalo said even before formal approval, ratings agencies will often issue a bulletin outlining the rating it might give the country once the deal is final. A rating allows new investors to come in and will guide the cost of borrowing.

But most countries will have an IMF lending programme, limiting what they can borrow commercially.

Maret said this prompts governments to seek extra relief in whatever form available – seeking better terms by debt-for-nature swaps, which can offer a better price in exchange for conservation, buybacks or more concessional lending.

Sifon-Arevalo said four countries that previously defaulted – Uruguay, Greece, Indonesia and Cyprus – now have investment-grade ratings – but that is unusual, and many former defaulters are mired in a “false default”, with ratings at sub-investment grade at B or below.

“There’s a lot of sovereigns that emerge from default and they stay there basically barely above the default,” he said.

  • FILE PHOTO: A woman displays a selection of Kwacha notes, the national currency and money used in Zambia in Lusaka, Zambia February 27, 2024. REUTERS/Namukolo Siyumbwa
By LIBBY GEORGE

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