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Zambia Nears Exit from Default with Historic $4 Billion Bond Restructuring Deal
In a significant move towards resolving its financial distress, Zambia has reached a revised agreement with private investors to restructure nearly $4 billion in US dollar bonds. This landmark agreement propels the bankrupt nation of southern Africa closer to emerging from a protracted default that has strained its economic relations, particularly highlighting tensions between China and other creditors.
The deal, announced on a recent Monday, is a result of intense negotiations and represents a turning point for Zambia, Africa’s second-largest copper producer. The agreement is said to offer more debt relief than a previous arrangement rejected by China, Zambia's largest single creditor, last November. The rejection was based on perceptions that the initial deal unduly favored private investors.
President Hakainde Hichilema of Zambia heralded the agreement as a historic achievement in a social media post. The Zambian government has also indicated that China, along with other official creditors, is satisfied with the conditions of the new deal. This development comes after delays that positioned Zambia as a case study in the shortcomings of the G20's initiative for swift resolution of debt crises in impoverished nations.
The new terms entail bondholders accepting a reduction in the face value of their claims by $840 million, an increase from the $700 million agreed upon in the initial deal. This adjustment elevates the direct financial impact on bondholders from 16% to 22% of their total claims, reflecting a 5% discount rate used by official creditors to evaluate the cash flow relief in the restructuring.
In addition to the haircut, the agreement extends the repayment timelines and introduces payment relief measures, ensuring Zambia continues to benefit from a $1.3 billion bailout from the International Monetary Fund (IMF). Furthermore, bondholders are set to receive improved terms on a $1.35 billion portion of the bonds, contingent on the Zambian economy’s capacity to handle increased debt or if it surpasses the IMF’s critical performance benchmarks.
The announcement saw Zambia's defaulted dollar bonds surge to approximately 74 cents on the dollar, buoyed by renewed optimism for a resolution. With official creditors, including China, consenting to relief on over $6 billion of debt, addressing private creditor agreements remains the final obstacle for Zambia to overcome its 2020 default on roughly $13 billion of debt.
The path forward entails negotiating terms with other commercial creditors, including Chinese banking institutions. A steering committee representing the external bondholders emphasized that swift implementation of the debt restructuring agreement benefits not only Zambia but the broader creditor community.
President Hichilema’s administration has confirmed that the agreed terms align with the burden-sharing perspective of official creditors, signaling that previous objections from China have been resolved. The agreement also includes safeguards to prevent "certain other creditors" from receiving more favorable terms than those extended to bondholders, addressing concerns over future negotiations with commercial creditors.
The urgency to finalize a restructuring agreement has escalated in recent months due to rising inflation and the impact of drought in Zambia, compounded by the depreciation of its currency against the US dollar. This deal marks a critical step towards economic stabilization and recovery for Zambia, offering a blueprint for resolving similar debt crises in other nations.
