Zambia’s bonds drop on expected restructuring

Zambia’s bonds have slumped after the country’s government called in advisers to help restructure its debt, as investors worry that the coronavirus crisis could trigger a wave of defaults in emerging markets.

The copper exporter was already struggling with a growing debt burden, much of it in the form of loans from China, before the pandemic caused big outflows from emerging-market debt funds and a plunge in metals prices. On Tuesday, Zambia’s finance ministry contacted banks asking for advice on restructuring up to $11.2bn of foreign debt, according to Bloomberg. The ministry also said it will not restructure without first consulting creditors and it aims to get its debt on a sustainable footing.

The country’s dollar bonds, which have long traded at a sharp discount to their face value, tumbled further to around 38 cents on the dollar. The bonds traded in the low 60s at the start of the year.

“This is the government recognising what the market already knew,” said Kevin Daly, a fund manager at Aberdeen Standard Investments. “They have been relying on Chinese loans for big infrastructure projects but the debt just isn’t sustainable.”

Zambia’s currency, the kwacha, is among the worst performers in the world so far this year, losing 22 per cent of its value against the dollar.

The coronavirus pandemic has hit emerging economies hard, prompting fears that many may struggle to service their overseas debt. Ecuador’s Congress, for example, last week called on the government to suspend debt payments to free up cash to fight the virus.

“The big question we have is who is next?” said Mr Daly, adding he thought oil producers in the emerging world could also run into trouble.

“Everything that was weak before the crisis is now getting destroyed,” said one emerging markets hedge fund manager. “Zambia was stressed before, and now it’s properly distressed. The dominoes are starting to fall now, I think we’ll definitely see more [emerging market] corporates restructure.”

Angolan bonds have also dropped sharply. A 10-year bond sold by the oil-rich nation in November, to bumper demand from investors, is trading at roughly 35 cents on the dollar.

Zambia first tapped bond markets in 2012, when the glamour for high-yielding dollar assets allowed it to borrow more cheaply than Spain. Further sales followed in 2014 and 2015, and the country has roughly $3bn of dollar bonds outstanding.

Uday Patnaik, head of emerging market debt at Legal & General Investment Management, said a restructuring of the bonds could be a precondition for Zambia receiving emergency aid from the IMF. “The IMF will only lend to you if they think your debt is sustainable,” he said.