Zambia Trades Blame With Bondholders Following Default

(Bloomberg) -- Zambia’s Finance Minister Bwalya Ng’andu said creditors were at least partly to blame for the country defaulting on one of its Eurobonds last week, while a group of bondholders said the missed payment risked setting a more adversarial backdrop for debt negotiations.

The southern African nation became the continent’s first pandemic-era sovereign default after holders of the debt refused to grant it a six-month interest-payment freeze on Friday. The bondholders demanded more information on Zambia’s debts to Chinese lenders, but wouldn’t sign the necessary confidentiality agreements, Ng’andu said in an interview broadcast by state television.

Zambia missed a $42.5 million interest payment on $1 billion of Eurobonds maturing in 2024. The default was unavoidable because the country, which had received some debt relief from China Development Bank, had to treat all creditors equally and had already built up arrears on other loans, Ng’andu said. The Export Import Bank of China told the country it would suspend payments of all interest and principal on sovereign loans amounting to $110 million due between May 1 and Dec. 31.

The 2024 notes fell 1.7% to 45.1 cents on the dollar by 4:29‘ p.m. in London, and the non-payment has triggered cross-default provisions in all the outstanding dollar bonds.

The bondholders committee, whose 15 members in aggregate represent more than 40% of Zambia’s $3 billion in outstanding Eurobonds, said on Monday investors had been unable to consent to a debt standstill because they never received information they needed for an informed decision. That includes details on Zambia’s “policy trajectory” and fiscal framework, and transparency on how the government intends to deal with other creditors.

There had been no direct discussions between bondholders and the authorities to date, the group said in an emailed statement.

Reserving Rights

“The committee views the authorities’ decision as both unnecessary and unfortunate, and this unilateral action risks establishing a more adversarial backdrop to future discussions with bondholders,” the committee said. While members are ready to engage constructively, they “reserve the right to consider other options and remedies.”

Zambia has announced plans to continue borrowing over the next three years, and to service these debts, according to the committee. It therefore has “no basis to conclude that the authorities intend to treat bondholders on an equitable basis,” it said.

Ng’andu also called on the International Monetary Fund for support as he tries to convince commercial creditors to accept an interest-payment holiday while Zambia restructures as much as $12 billion in external debt.

“The fund continues to be in discussion with the Zambian authorities on how best the acute economic difficulties the country is facing can be addressed,” an IMF spokeswoman said in response to questions Monday.

Some key comments from Ng’andu’s interview:

On defaulting:

• “The information they wanted required very elaborate information relating to loans we have with other creditors. The view and position of the other creditors was, ‘OK, you can do it but you must first have a confidentiality agreement with bondholders.’ As it turned out, they didn’t sign. The position of the Chinese banks is ‘you’re not going to give anybody any information’” without the confidentiality agreements in place.
• “The issue of paying bondholders alone is a fundamental issue to the other creditors. If I pay, the moment I pay, the other creditors are going to put dynamite under my legs and blow off my legs. I’m gone. I can’t walk anymore. If I don’t pay the bondholders, my legs will remain intact, but I’ll probably have a shot in the arm, and I’ll be bleeding in the arm. I can walk.”

On talks with the IMF:

• “A team is supposed to be coming next month for us to finalize agreement on exactly what specific instrument we are going to use. Is it the extended credit facility, is it a staff-monitored program? All those are the things that we need now to discuss. It’s not like there’s no engagement going on. There’s a lot of talking going on behind the scenes. The director for Africa will be coming most likely next month to continue the process.”
• “I said to them: ‘Imagine being us; a man drowning in a fast-flowing river. And you, the IMF, are standing by the bank with your arms folded and I’m screaming to you, help me, I’m drowning. And then you say to me, oh, we’ll help you when you come out of the water.’ That’s not helpful.”

On debt transparency:

• “Right now, we have given out a lot of information. To the extent that there is not very much left to be hidden, if there was anything to be hidden. There may be challenges around the issue of trust, but the fact of the matter is that the information is available and we will give it.”

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