Zambia warns of default if creditors refuse interest holiday

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(Photo by Per-Anders Pettersson/Getty Images)
(Photo by Per-Anders Pettersson/Getty Images)

Zambia has told creditors including Eurobond holders that the government won’t be able to meet its obligations if they don’t agree to its proposed interest payment holiday. The bonds fell to four-month lows.

The government announced last month it was seeking about $120 million in deferrals from holders of its $3 billion in Eurobonds for six months, while it works on a debt-restructuring strategy. It’s asked all creditors for similar relief, after some non-commercial creditors agreed to a payment freeze under a G-20 plan, according to the finance ministry.

“Should Zambia fail to reach an agreement with its commercial creditors, including holders of its Eurobonds, on the terms of the appropriate standstills, as previously stated, the Republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulating arrears,” Fredson Yamba, the secretary to the Treasury, said in an emailed statement on Tuesday.

The only foreign-currency debt that Zambia will continue to pay on time is to multilateral agencies and debt for a few priority projects that have an immediate economic and social impact, he said. That’s a reversal from the Finance Minister’s comments last month, when he said the government had budgeted for Eurobond coupon payments next year to avoid default in the event that holders rejected the government’s standstill request.

Eurobond holders are due to meet on Oct. 20 to vote on the proposal, and a group of holders already said they couldn’t vote in favor without further assurances and transparency from Zambia. A $42.5 million payment on $1 billion of dollar bonds due 2024 is scheduled for Oct. 14, and the government has 30 days to honor that before it’s deemed to be in default.

The notes fell 1.5% to 47.7 cents on the dollar by the close in LondonTuesday, the lowest level on a closing basis since June 18.

If bondholders approve the standstill, Zambia “will recognize interest accruing on deferred coupons in the restructuring process, at a rate to be determined in good faith with noteholders,” Yamba said

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