Zambia’s byzantine restructuring ordeal is almost over

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A mere three years after it defaulted, Zambia has finally struck a restructuring agreement with its bondholders. Which is great, but the saga doesn’t exactly bode well for other distressed countries.

From the external creditor group representing the $750mn 2022 bond, the $1bn 2024 bond and the $1.25bn 2027 bond:

The proposed agreement will provide the Government with significant cash flow and debt stock relief to support a restoration of macro-economic and debt sustainability in the context of the IMF-financed programme and cure the long-standing default on the Eurobonds. The proposed restructuring terms provide both substantial up-front debt relief and future relief commensurate with Zambia’s economic progress in the next few years, with enhanced repayment terms and higher coupons on one of the two new Eurobonds to be issued in the event that Zambia’s debt carrying capacity, as assessed by the IMF and World Bank’s Composite Indicator, moves to medium from weak or Zambia continues to meet or exceed current IMF projections as measured by exports of goods and services and fiscal revenues measured in US Dollars.

The creditor statement was light on detail but Zambia’s finance ministry has pinged the LSE with its own statement, which puts the nominal haircut at $700mn, the new average maturity at 15 years and the overall cash flow relief at $2.5bn over the course of the country’s current IMF programme.

As expected the restructured bonds include will some sweeteners in case Zambia recovers strongly — the “enhanced repayment terms” creditors referenced above — in the form of faster repayment and higher interest rates.

This is in line with what it promised its thorny Chinese creditors earlier this year. But while that is contingent on the IMF upgrading its assessment of Zambia’s “debt-carrying capacity” at the end of its programme, Zambia stressed in its release today that it:

. . . acknowledges that a one-time validation test based on the debt carrying capacity assessment by the IMF and the World Bank to determine whether the Upside Case Treatment would apply may not form the basis of a marketable instrument. To ensure liquidity and adequate market pricing of the New Bonds, the agreement in principle entails a dual trigger mechanism.

Another separate Zambian finance ministry document lays out the details of this dual trigger.

1) Zambia’s Composite Indicator meets or exceeds a score of 2.69 for two consecutive semi-annual reviews, paving the way for an upgrade to medium debt-carrying capacity.

2) The 3-year rolling average of the USD exports and the USD equivalent of fiscal revenues (before taking into consideration grants) exceeds the IMF’s projections as laid out in the First Review of the IMF’s Extended Credit Facility Arrangement released in July 2023.2

The “Composite Indicator” is an IMF thing, and you can find out more about that here.

Anyway, this is obviously good news. But taking a step back it’s hard not to worry about what the length and complexity of this debt workout implies for the many other countries that are already up the creek or paddling towards it.

And the Zambian situation really does hammer home the point that the IMF and others have made for ages: countries restructure far too late, and even when they do the debt relief they eventually secure is often too little to secure a durable recovery.

As leading sovereign debt lawyer Lee Buchheit once told Alphaville:

The common perception is that emerging market sovereigns are looking for an excuse to default on their debt, and, in fact, probably exactly the opposite [is true]. They delay it far beyond the point that anyone would think the situation is reversible. It is a testament to the belief in the efficacy of prayer.

Further reading:

— Ten lessons from Zambia’s (incomplete) restructuring