Zambia default worries hit rating

Zambia’s long-term foreign-currency issuer default rating (IDR) has been lowered to C from CC by Fitch Ratings, on default concerns.

The country has not been given an outlook, as Fitch does not assign outlooks for countries with a rating of CCC or below.

Fitch is worried about Zambia defaulting, following the government’s move to suspend debt service payments on its three outstanding Eurobonds.

A suspension in payments, if agreed to by bondholders, would constitute a distressed debt exchange (DDE), according to the rating agency.

The Zambian authorities have indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached.

However, Fitch judges that there is a high risk of a missed debt payment over the forecast horizon.

Of the three bonds, the largest is a 12-year $1.25 billion Eurobond, carrying a fixed coupon of 8.97% and is due in July 2027.

The second largest is a $1 billion Eurobond, with a 10-year tenor, which carries a fixed coupon of 8.5%, maturing in April 2024.

The smallest of the three is a $750 million Eurobond, with a 10-year tenor, which carries a fixed coupon of 5.4% and is due in September 2022.

On 22 September 2020, the government of Zambia issued a consent solicitation to holders of the three Eurobonds.

The government is requesting a suspension of debt service payments on the bonds for a period of six months from 14 October 2020. This covers three coupon payments due on 14 October 2020, 14 January 2021 and 20 March 2021.

Fitch deems this formal request to be the initiation of a default-like process, consistent with a C rating.

Should a majority of the creditors agree to the request at the thresholds specified in collective action clauses, the payment standstill would constitute a DDE under Fitch’s criteria.

Zambia’s already constrained external liquidity was exacerbated by the shock from the coronavirus disease 2019 (COVID-19) crisis.

Fitch would consider upgrading the rating if Zambia withdrawals the consent solicitation and payment of upcoming coupon payments within stipulated grace periods.

The rating agency would consider a further downgrade if Zambia completes the proposed suspension of scheduled debt service payments, or any other proposal that entails a DDE.

Failure to make scheduled coupon payments within the grace period, would also lead to a further downgrade, according to Fitch.

Meanwhile, Fitch has also downgraded the ratings on Zambia’s senior unsecured foreign-currency bonds included in the consent solicitation to C from CC.

This comes after Moody’s downgraded Zambia’s rating to Ca from Caa2, due to the increasing probability of debt default – on the back of weak governance, earlier in 2020.

See full rationale here