Hakainde Hichilema, President, Zambia

The official creditor committee (OCC) and Zambian authorities’ agreement on restructuring USD6.3 billion in bilateral debt should allow the country to complete the first review of its IMF Extended Credit Facility arrangement, says Fitch Ratings.

This would pave the way for the release of around USD188 million in IMF financing, the global rating agency said in a note.

Fitch however noted that that an agreement with private creditors would still be necessary before the rating firm could upgrade Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from the current level of ‘RD’ (Restricted Default).

“An MoU between Zambia and the OCC has yet to be signed, but statements from various officials suggest the deal will extend debt maturities to 2043, implying an average extension of more than 12 years, rather than involving any write-down”, it said in a statement.

The agreement is set to include a three-year grace period on principal payments and to lower interest rates to very concessional levels – at 1% until 2037, according to Bloomberg – rising to a maximum of 2.5% from 2037.

It said in the commentary noted posted on its website that principal repayments will likely resume in 2026, at a limited level of around USD30 million yearly, until 2035.

Officials indicate the deal would represent a present value (PV) reduction of around 40% of the external debt being restructured, falling short of the 49% PV reduction the Zambian authorities announced they were seeking in October 2022.

Nevertheless, the agreement is supposed to comply with the objectives set by the IMF, Fitch ratings stated, adding that the agreement contains an adjustment clause if Zambia’s economy outperforms the assumptions in the IMF’s and World Bank’s Debt Sustainability Analysis (DSA), improving its debt-carrying capacity to medium from weak.

Bloomberg reports this would permit interest rates of up to 4%, rather than 2.5%, saying the final maturity date would also be brought forward, to 2038, from 2043.

The IMF currently classifies Zambia as a country with weak debt-carrying capacity, though in its September 2022 assessment, Zambia’s DSA composite indicator was close to the “medium” threshold. The revision clause appears unique among sovereign debt restructurings and could set a precedent for future cases.

It could create upsides for creditors if the IMF later finds that the current DSA underestimates Zambia’s debt-carrying capacity, but may also weigh on Zambia’s credit profile, reducing the upside potential for its rating after emergence from default.

A debt treatment with private creditors is still necessary for Zambia to emerge from its current state of default. They will be asked to provide treatment on terms at least as favourable as those agreed with official creditors.

We believe Zambia could achieve such a comparable debt treatment through various options, including debt haircuts, maturity extensions, and reduced interest rates. If private creditors are also able to include conditional adjustment clauses in their debt treatment, we believe this could smooth the path to an agreement”.

The Zambian Ministry of Finance has confirmed that approximately USD1.75 billion in commercial creditor claims insured by China’s Sinosure have been reclassified as other commercial creditor claims, rather than official creditor claims, during recent restructuring negotiations.

It is not clear if this will complicate efforts to reach a treatment with private creditors. Fitch believes the delay between the OCC’s provision of financing assurances in July 2022 and the latest agreement largely reflected issues raised by China.

“Once Zambia has reached an agreement with bondholders, including private creditors, on restructuring its Eurobonds and we assess that it has completed that restructuring process, we would assign a Long-Term Foreign-Currency IDR based on a forward-looking assessment of the sovereign’s willingness and capacity to honour its foreign-currency debt obligations”, Fitch said.


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