Ethiopia May Engage Private Creditors After Debt Review

(Bloomberg) -- Ethiopia may approach private creditors for debt talks after it reviews liabilities with official lenders amid security risks that are adding to investors' worries.

The nation's Eurobonds plunged the most on record last week after State Minister of Finance Eyob Tekalign said the government will seek to restructure its external debt under a Group of 20 debt-suspension program. With no details on how the decision would affect holders of Ethiopia's $1 billion of 2024 Eurobonds, many investors responded by selling the securities.

Only after talks involving official creditors, which the International Monetary Fund is assisting with, will the government be able to inform other creditors on the “need for broader debt treatment discussions,” the finance ministry said in a press statement on Monday.

Yields on Ethiopia's $1 billion of 2024 Eurobonds climbed 26 basis points to 8.85% by 1:50 p.m. in London after jumping 207 points on Friday to the highest since May. The premium investors demand to hold the nation's dollar bonds rather than U.S. Treasuries widened 31 basis points to 807, compared with the 538 average for African sovereign issuers, according to JPMorgan Chase & Co. indexes.

“In theory, a common framework should speed up the debt restructuring process, but it remains to be tested,” Morgan Stanley & Co. analysts Jaiparan Khurana and Simon Waever said in a note. “Questions around enforceability of the MoU terms to the private sector still persist, especially considering that the private sector is not a signatory.”

Ethiopia is the second African country after Chad to announce plans to review debt under the G-20 common framework, which aims to include China and private lenders into a global debt-relief push.

Ethiopia, like other African nations, is looking to offset the impact of the coronavirus pandemic on its economy. Ethiopia's position is, however, exacerbated by fighting in the northern Tigray region and a border dispute with Sudan that's threating to further destabilize the region.

“Possible implementation of the debt treatment under the Common Framework will address the debt vulnerabilities of the country, while preserving long-term access to international financial markets,” the finance ministry said in the statement. That will help in “unlocking more growth potential,” it said.

As with earlier bilateral debt relief, including via the Paris Club, Eurobond holders can choose not to participate in the program, according to the Morgan Stanley analysts. “The key issue would be how insistent bilateral creditors would be on the private sector participating,” they said.

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