Zambia’s Debt Workout Shifts Back to China After Bondholder Pact

(Bloomberg) -- Zambia’s three-plus-year slog to escape default is shifting to $3.5 billion in commercial debt mainly owed to Chinese lenders, after it finally struck a deal with holders of its eurobonds.

Among the loans Zambia still needs to revamp are $1.9 billion borrowed from state-owned creditors in China including Industrial & Commercial Bank of China Ltd. and China Development Bank, according to a person familiar with the situation. Engagement with some of the Chinese creditors has progressed well, the person said.

Finance Minister Situmbeko Musokotwane expects the eurobond deal struck Monday should speed the process because it shows what’s required to get to yes when dealing with multiple different lenders with dueling priorities.

For Zambia, which in November 2020 became Africa’s first pandemic era sovereign defaulter and has been trying to restructure ever since, finalizing the process is critical.

“Discussions have already started” with remaining creditors, Musokotwane told Lusaka’s Hot FM radio on Tuesday. The bondholder pact “will quickly help us to come to an agreement because the precedent and the terms have been more or less set.”

As the co-chair of Zambia’s official creditor committee, China has worked on achieving important progress, Foreign Ministry spokesperson Lin Jian told reporters in a regular briefing Tuesday. Beijing will continue to coordinate with relevant parties to properly move forward the debt treatment process, he said.

Zambia is the test case for the Group of 20’s Common Framework approach to help poor nations rework debts owed to sovereign and commercial creditors and bondholders. After several false starts, Monday’s agreement sets a key milestone.

It will see investors swallow bigger losses than they initially backed last year, after a separate group of official creditors owed $6.3 billion rejected that restructuring as not comparable to the relief they had granted Zambia. While China accounted for about $4.1 billion of the $6.3 billion, the nation asked to reclassify CDB loans as commercial rather than bilateral debt. 

Bondholders ultimately agreed to a 21.6% haircut of their total outstanding claims, while receiving $543 million in repayments by June next year. The plan is to complete the restructuring by the end-May or early-June, according to a person close to the bondholders committee, who asked not to be named.

The official creditor committee preferred debt relief in the form of longer maturity extensions and lower interest rates, without writing off any of the debt. 

Both deals include an upside scenario, where creditors get higher payments if Zambia’s economy performs better and its debt vulnerabilities improve. 

Zambia’s kwacha appreciated against the dollar for a second-straight day, gaining 1.4% by 7:54 a.m. in Lusaka to 25.0625.

A severe drought — the worst on record for large parts of the country — has added urgency for Zambia to conclude the restructuring. Africa’s second-biggest copper producer relies on hydropower for about 85% of its electricity generation capacity, and a lack of rainfall has caused severe shortages. 

The poor rains have also destroyed crops in about 45% of the total planted area weeks before the staple corn harvest, prompting President Hakainde Hichilema to declare a national disaster. 

Other major commercial creditors that Zambia needs to reach restructuring deals with include Investec, Israel Discount Bank and Standard Chartered Plc— with those three together accounting for more than $1 billion. 

(Updates with other commercial creditors in the final paragraph.)

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