This report does not constitute a rating action.
DUBAI (S&P Global Ratings) March 26, 2024--S&P Global Ratings today said that Zambia’s recently announced exchange offer to creditors on the government’s three Eurobonds (due 2022, 2024, and 2027) should clear the way for the country’s exit from foreign currency (FC) selective default (SD). We will likely raise our sovereign FC ratings on Zambia following the exchange offer's successful completion.
The deal, while a few years in the making, comes at a critical time for Zambia, which is facing one of its worst droughts on record. Agriculture output and electricity generation--which is mostly hydroelectric--will likely fall this year, elevating food prices, reducing foreign currency earnings, and dampening economic growth prospects in 2024. We estimate usable FC reserves at about $2.7 billion, equivalent to four months of import coverage.
Nevertheless, debt relief provided in the agreement with bondholders, and from official creditors, should provide the government more fiscal space to continue economic reforms and address challenges exacerbated by the drought. The agreement will likely also keep the government on track for disbursements under its $1.3 billion IMF program and potentially unlock further external financing from other multilateral partners.
Under the new terms, two new bonds will be issued: one for $1.7 billion with a final maturity year 2033, and one for $1.35 billion (with a final maturity either in 2053 under a pre-agreed base scenario or 2035 in an upside scenario). Bondholders forego approximately $840 million of their current claims (the total outstanding now amounting to about $4 billion compared with the original $3 billion value of the bonds, due to accrued interest and costs) and provide cash flow relief of approximately $2.5 billion over the IMF program. On the $1.35 billion bond, principal installments could be accelerated and interest payments increased if Zambia’s economic performance meets an agreed upside scenario upon exiting the current IMF program.
The deal follows an initial agreement with bondholders from October 2023 that official creditors rejected on comparability-of-treatment concerns. Importantly, the government has confirmed that official creditors view the new terms as acceptable. In October 2023, Zambia signed a memorandum of understanding with official creditors on comprehensive debt treatment. We understand that Zambia is working towards implementing bilateral agreements with creditor countries. There is also yet to be an agreement with the remaining commercial creditors.
The rating after default will reflect Zambia’s post-default creditworthiness, considering economic prospects and sustainability of public finances. Our post-default ratings tend to be in the 'CCC' or 'B' categories.
We lowered our FC ratings on Zambia to 'SD/SD' in October 2020 when the government suspended debt service payments to external creditors, including $3 billion in Eurobonds. The local currency ratings are 'CCC+/C' with a stable outlook.
Related Research
- Zambia, Nov. 27, 2023
- Bulletin: Zambia Nears Exit From Foreign Currency Default After Announced Commercial Debt Restructuring, Oct. 30, 2023
- Bulletin: Zambia's Agreement With Bilateral Creditors Is An Encouraging Step For Commercial Debt Restructuring, June 26, 2023
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