UPDATE 4-Zambia will miss Eurobond payment, setting stage for default

* Zambia set to become Africa’s first COVID-era default

* Eurobond holders reject request to defer interest payments

* Government says won’t pay missed coupon by end of day (Adds creditor reaction, IIF comment)

LUSAKA/LONDON, Nov 13 (Reuters) – Zambia will not pay an overdue Eurobond coupon before a 30-day grace period expires at the end of the day, the finance minister told Reuters on Friday, setting the country on course to become Africa’s first pandemic-era sovereign default.

Zambia missed payment of a $42.5 million coupon on one of its dollar-denominated sovereign bonds last month.

The government had requested that bondholders grant it a deferral of interest payments until April as it struggles with the dual burdens of fighting the pandemic and a limping economy. But the creditors rejected that request earlier on Friday.

“They will not support the standstill or consent solicitation and, given our precarious position that requires us to treat all creditors equally, we have no other alternative but to accumulate arrears,” Finance Minister Bwalya Ng’andu said.

He said Zambia was continuing to engage with bondholders through its advisers and hoped that would “lead to some solution along the way”.

Negotiations with the International Monetary Fund (IMF) were also continuing, he said, but declined to give further details.

A source familiar with the thinking of the Zambia External Bondholder Committee – a large group of creditors holding more than 40% across all Zambia’s bonds and a blocking stake in each issue – said they had for six weeks sought clarity from the authorities about a credible medium-term framework for restoring fiscal sustainability.

They also wanted more information on the country’s plans to deal with other creditors, including Chinese lenders, the source said.

“Authorities have not addressed any of these concerns anywhere close to a degree which would have allowed bondholders to consider providing near-term relief,” said the source, who asked not to be named.

WHAT NEXT?

With a number of African countries struggling with unsustainable debt, Zambia is being closely watched as a test case for how borrowers and creditors might navigate a broader debt crisis.

If Zambia does indeed fail to pay its coupon, it will be classified as a default on its three outstanding Eurobonds with a face value of $3 billion.

Even before the coronavirus pandemic caused a global economic slowdown, Zambia was struggling with mounting debt.

Data from Lusaka showed Zambia’s total external debt stock stood at $4.8 billion, or 18% of gross domestic product, at the end of 2014. Five years later, it had more than doubled to $11.2 billion, or 48% of GDP.

The IMF predicts a rise to nearly 70% of GDP by the end of this year.

The Eurobonds are not its only debt. Zambia owes some $3.5 billion in bilateral debt, $2.1 billion to multilaterals and $2.9 billion to other commercial lenders. It owes about $3 billion to China and Chinese entities.

Zambia’s kwacha has tumbled nearly a third since the start of the year, adding to the pressure.

Zambia does benefit from the G20 Debt Service Suspension Initiative (DSSI). However, external debt owed to Paris Club of creditor nations makes up just 2% of total external debt and 2.5% of external debt service due in 2021.

“Achieving intercreditor equity will fall largely on Chinese creditors and international bondholders,” the Institute of International Finance (IIF) chief economist Elina Ribakova wrote in a note.

Zambia’s dollar bonds traded around half a cent on the dollar higher on Friday, giving away some of their earlier gains and changing hands at 44 to 46 cents on the dollar, according to Tradeweb data.,,

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