Zambia reaches debt-restructuring agreement with bondholder committee

By Marisa Wong

Los Angeles, March 25 – The government of Zambia has, through its ministry of finance and national planning, reached an agreement with members of the steering committee of the ad hoc creditor committee on the restructuring of its eurobonds, according to separate press releases put out on Monday by the government and the steering committee.

Following private discussions between March 18 and March 25, the government reached a conclusive agreement with the external bondholder steering committee to restructure its $750 million 5 3/8% notes due 2022, $1 billion 8½% notes due 2024 and $1.25 billion 8.97% amortizing notes due 2027.

The members of the steering committee currently own or control about 16% of the outstanding bonds, while all the members of the committee currently own or control more than 33% of the outstanding bonds.

Under the agreement, bondholders will be invited to exchange and/or vote in favor of a consent to amend the terms of their bonds for new fixed-income instruments representing unsecured obligations of the government.

The structure of the agreement is unchanged compared to the agreement in principle reached on Nov. 20, with some revised terms for both the base case and upside case treatments (described below).

Namely, two new eurobonds totaling $3.05 billion will be issued which provide future debt relief commensurate with Zambia’s economic progress in the next few years.

While the new 2024 agreement requires both additional debt reduction and net present value relief compared to the restructuring terms agreed under the November agreement, it also includes enhanced repayment terms and higher coupons on one of those bonds, in the event that Zambia’s debt carrying capacity, as assessed by the IMF and World Bank’s composite indicator, moves to medium from weak or Zambia continues to meet or exceeds current IMF projections as measured by exports of goods, services and fiscal revenues measured in dollars.

The agreement entails important concessions from the bondholders, while providing the required debt relief to the government. Under the agreement, bondholders would forego about $840 million of their claims and provide cash flow relief of roughly $2.5 billion during the IMF program period. Respective weighted average maturity will be 15 years and eight years under the base case treatment and the upside case treatment.

As a result, the present value concessions from the bondholders at current market rates will be significant. However, these concessions are necessary given the constraints faced by Zambia and are essential to achieve the relief required under the debt sustainability analysis to restore financial stability to the country.

The agreement with the committee also includes the government accepting certain non-financial terms of the new bonds, including a most favored creditor clause that will require the government to ensure some other creditors do not receive a better recovery in the restructuring on net present value terms, a loss reinstatement clause if Zambia were to default during the term of the existing IMF program as well as some ongoing information delivery requirements by Zambia.

The government has received confirmation that the agreed terms are compatible with its official creditor committee’s assessment of comparability of treatment – which was not the case for the November agreement – and the IMF’s program parameters under the second review framework.

The government and steering committee both said they intend to use their best efforts to finalize documentation for the exchange or consent as soon as possible.

Creditor treatment

The outstanding claims as of March 31 total $3.89 billion, including $3 billion original face value.

The $3.05 billion of new bonds would consist of $1.7 billion of bond A and $1.35 billion of bond B.

Amortization would begin in 2024 for bond A, and the bonds would mature in 2033. This applies to both base case and upside case.

For bond B, amortization would begin in 2051 (in three equal installments) in the base case and 2032 (in four equal installments) in the upside case, and maturity would be in 2053 in the base case and 2035 in the upside case.

The coupon structure for bond A is the same in both cases: 5¾% until June 2031, then stepping up to 7½% until maturity.

The coupon structure for bond B is in the base case, ½% until maturity; and, in the upside case, ½% until the trigger date (when the terms relevant to the upside case take effect), 7½% from the trigger date until June 2031 or otherwise 6% PIK accruing over the same period, 7½% from June 2031 until maturity.

Advisers

Members of the committee include the following asset managers: Amia Capital LLP, Amundi (UK) Ltd., Farallon Capital Management, LLC, Greylock Capital Management, LLC and RBC BlueBay Asset Management.

Lazard Freres and White & Case LLP is acting respectively as financial and legal advisers to Zambia. The creditor committee is being advised by Newstate Partners LLP and Weil, Gotshal & Manges (London) LLP.

Questions can be directed to Spencer Jones, Newstate Partners LLP (+44 20 3998 8199 or sjones@newstatepartners.com), Annie Emery, Newstate Partners LLP (+44 20 3998 8187 or aemery@newstatepartners.com) and Andrew Wilkinson, Weil, Gotshal & Manges (London) LLP (+44 20 7903 1068 or Andrew.Wilkinson@weil.com).

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