Implications of Zambia’s Sovereign Debt Restructuring 
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Implications of Zambia’s Sovereign Debt Restructuring 

A landmark deal for Zambia as agreement was reached on restructuring its $6.3bn debt. We explore what it means for other defaulters

  • Though Zambia has reached a landmark deal with official creditors, we only see limited positive knock-on effects for other defaulters.
  • Given Ghana’s medium debt-carrying capacity categorisation and Sri Lanka’s middle income country status, applying the G20 framework to their debt profile would be more difficult.
  • After a disordered rally in emerging markets (EM) distressed credit year-to-date (YTD), we no longer find valuations attractive in defaulted credit as the return profile is now more dependent on broader market risk appetite and less on idiosyncratic price gains.

In June, Zambia reached an agreement in principle with official bilateral creditors to restructure its $6.3 billion debt, unlocking a $188 million International Monetary Fund (IMF) disbursement and marking a significant step forward in placing the country’s debt on a sustainable trajectory following its default in 20201. Notably, after many years of disagreements with multilateral institutions, China agreed to restructure Zambia’s official debt under the G20 Common Framework, an initiative designed to structurally support low-income countries with unsustainable debt 2. By accepting the Paris Club’s “comparability of treatment” criteria that tasks all creditors with providing similar levels of debt relief, this current breakthrough could potentially herald a way forward for other defaulted emerging market sovereigns3. A major innovation that finalised the deal is the cashflow structure that allows for higher creditor recoveries if the World Bank upgrades Zambia’s “debt-carrying capacity” from “weak” to “medium” by the end of the IMF program in 2026. This template is expected to be replicated in negotiations with its private commercial creditors.

 

In Ghana, the Zambia deal potentially de-risks its own official creditor negotiations given participation in the same G20 Common Framework.  While we believe China will be less of a headwind in Ghana given its much lower share of the debt stock, crafting a similar upside cashflow recovery is more difficult as Ghana is already categorised as a “medium” debt-carrying capacity country.  After restructuring its domestic debt, including a risky strategy to impose deep losses on the central bank’s holdings of government debt, the remaining headwind for Ghana to exit its default state would be a conclusion of negotiations with many Eurobond holders4.

 

In Sri Lanka, China makes up a significant share of its external debt which makes this case more comparable to that of Zambia, raising hopes that a similar deal can be reached soon. However, Sri Lanka’s status as a low middle income nation means that it does not qualify for a debt treatment under the Common Framework5. China is currently taking part in the official creditor meetings only as an “observer” rather than a participant, signalling its preference for a bilateral side deal under more favourable terms.  While we think China could be open to expediating the process, it remains unclear whether there is political consensus within China’s leadership on whether loans from state-owned policy banks (the source of most of Sri Lanka’s China borrowings) should be treated as “official” lending.

 

From a performance perspective, distressed EM credit has significantly outperformed YTD, with C-rated names returning nearly 30% relative to the 3.25% EMBIG index return. Coming into the year, these holdings were perhaps oversold, but we are now more circumspect about the prospects for the distressed credit bucket following this recent rally. In the case of Ghana, we think a deal with bilateral creditors can come together by year-end, although current market prices no longer offerbmuch margin of safety for what we see as growing downside risks. Without higher conviction in the underlying credit story in Ghana, we no longer believe that the risk/reward profile is an attractive one. 

 

In Sri Lanka’s case, we are less optimistic that the Zambia deal can provide an effective template to restructure debts with China. We believe these uncertainties could add complexities to the restructuring process and threaten to drag negotiations beyond what the government currently expects, limiting near term price upside. 

 

While Zambia’s deal with official creditors is certainly a positive development that can help other distressed sovereigns avoid the same extended 3+ years in default, it is no silver bullet.  EM distressed investing remains highly idiosyncratic and requires a deep understanding of the many factors at play.  Our focus on fundamental credit research is well placed to capitalise on these conditions.

21 september 2023
Bowers Gordon
Gordon Bowers
Research Analyst, Emerging Markets Fixed Income
Eng Tat Low
EM Sovereign Analyst
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Implications of Zambia’s Sovereign Debt Restructuring 

1 Reuters, IMF approves $189 million payment to Zambia after first programme review, 14 July 2023

2 Bloomberg, Zambia’s Deal With China and Others Clears Way to Revamp Bonds, 29 June 2023

3 The Herald, Zambia wins debt relief, sets precedent for other nations, 26 June 2023

4 Bloomberg, Ghana Anticipates ‘Very Hard’ Talks on Eurobond Revamp, 19 June 2023

5 Financial Times, Sri Lanka debt talks with China a test of creditor appetite for bailout, 7 October 2022

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. 

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. 

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