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Foreign bondholders are willing to block Zambia’s plans to suspend interest payments without guarantees of equal treatment with large lender China, say people familiar with their plans, indicating that the test case of a possible series defaults related to a pandemic in Africa could be controversial.
Bwalya Ng’andu, Zambia’s finance minister, addressed bondholders in a presentation on Tuesday but, unusually, offered few opportunities for creditors to ask questions. Bondholders say they have had little contact with the country.
A group of creditors that includes hedge funds such as Pharo and Amia Capital is concerned that the government is not being clear about the true size of the Chinese debt it has accumulated in recent years. The group, which controls 40 percent of the country’s bonds and has the power to block the plan, is ready to ask the government to engage with them directly and convince them why they should back it, the people said.
“We know that it is Chinese debt that has pushed Zambia to the limit,” said Kevin Daly, a portfolio manager at Aberdeen Standard Investments, which owns some Zambian bonds. Bondholders want more transparency, but they also want to know what they intend to do with Chinese loans. That is essential for debt sustainability. “
Last week, Zambia asked holders of $ 3 billion dollar-denominated bonds to agree to a six-month moratorium while it grapples with the economic impact of Covid-19, a proposal that requires the consent of three-quarters. of bondholders.
In Tuesday’s presentation, a copy of which was seen by the Financial Times, Mr. Ng’andu said the country would “intensify its commitment” to creditors based on principles that include “fair dealing between creditors.”
However, bondholders remain skeptical of Zambia’s plans, pointing to what they perceive as an inconsistency in borrowing plans between the filing and the recent budget.
“Bondholders are not going to accept a restructuring on terms worse than other lenders,” said one investor. The big question was whether Zambia was “serious” about getting an IMF loan and agreeing on a plan to address its debt, the person said.
Resistance to the deal by bondholders highlights how huge Chinese loans to governments in sub-Saharan Africa could complicate attempts to agree to debt relief for countries pushed to the brink of default by the pandemic. So far, 42 of the world’s poorest countries, including Zambia, have secured the suspension of payments to some official creditors until the end of the year, as part of a G20 initiative.
While pressure has increased on private creditors to share some of the burden, governments have been reluctant to seek debt relief that could constitute a formal default and hamper their ability to borrow in the bond markets in the future.
Fitch lowered Zambia’s credit rating this week, saying the downgrade could herald a series of defaults in sub-Saharan Africa. The rating agency identified Angola, the Republic of Congo, Gabon and Mozambique as the most vulnerable countries.
Additional information from Colby Smith
