S&P thumbs down for Zambian default
Lusaka — S&P Global Ratings Services cut its assessment of Zambia’s debt to selective default after the southern African nation said it could not meet payments and skipped a coupon on its Eurobonds last week.
The action is the latest blow to Africa’s second-biggest copper producer, which is trying to convince bondholders to give it a six-month interest-payment holiday while it drafts debt-restructuring plans. The ratings company, which did not wait for a 30-day grace period to expire after the missed coupon payment, forecast the nation will remain in default at least through the six months.
“We view the non-payment of debt service and the statement that the government will not make debt-service payments as a default on its commercial debt obligations,” S&P said in a statement on Wednesday. The finance ministry did not immediately respond to calls seeking comment.
Holders of Zambia’s $3bn in Eurobonds were due to vote on October 20 on the government’s request for the payment freeze, but the meeting was adjourned to November 13 after a core group of creditors abstained to give more time for talks. Failure to secure approval and pay the coupon by the same date will render the country in technical default.
The $1bn of 8.5% securities due in 2024 extended declines on Thursday, falling 1.1% to 43.08c in the dollar in the early afternoon.
S&P gives selective default assessments to borrowers that are not paying a specific loan or class of debt on time, while meeting its other obligations. General default, or D, is when a borrower is not paying all or most of its creditors on time.
Zambia has said it is seeking to restructure as much as $12bn in external debt and will not be able to meet its foreign obligations except to multilateral institutions and for some key projects, if it does not get relief.
Finance minister Bwalya Ng’andu’s talk of reaching a restructuring agreement with Eurobond holders within months is probably overambitious, according to Irmgard Erasmus, an analyst at NKC African Economics. Rather, the nation “may be looking at a multiyear-debt reprofiling process”, she said on Thursday.
Bondholders have raised concerns about the transparency in Zambia’s treatment of other creditors, including state-owned Chinese lenders. They also want the government to sign an economic programme with the IMF, which may be difficult until after the general elections scheduled for August.
The IMF sees Zambia’s debt increasing to 120% of GDP, according to its latest regional economic outlook for Sub-Saharan Africa published on Thursday.
Half of Zambia’s $12bn external debt is owed to private creditors, and more than a quarter of the total is due to various Chinese lenders, according to S&P.
While the coronavirus pandemic worsened the country’s finances, its economy was already under strain after years of overborrowing and large budget deficits. The government has repeatedly pledged to trim the shortfalls and reach an agreement with the IMF, but its efforts to date have failed and investors are sceptical.
“A critical underlying challenge is that creditors are negotiating with an administration which has little credibility left,” Erasmus said.
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