Zambia is on the brink of becoming the first African country to default on its debt since the start of the pandemic, after investors rejected a request to suspend interest payments on its $3bn of dollar bonds.

Africa’s second-largest copper producer has until the end of Friday to make an overdue interest payment to bondholders. With the deadline approaching, vice-president Inonge Wina told the Zambian parliament that “we will not default”.

However, at a meeting on Friday, Zambia failed to secure the agreement of the two-thirds of bondholders needed to impose a six-month standstill on debt payments.

“While government regrets that the bondholders did not approve the requests made by Zambia in good faith, we remain committed to finding a consensual and collaborative resolution to debt sustainability issues,” the Zambian finance ministry said in a statement.

A creditor group representing fund managers holding roughly 40 per cent of the bonds had previously indicated it would block the proposal, citing worries about a lack of transparency regarding Zambia’s other debts, particularly those owed to China. The Zambian finance ministry failed to assuage those concerns in recent weeks, according to two people familiar with the creditor group’s thinking.

“As far as we are concerned, we still don’t know what’s going on with the bulk of the Chinese debt, so I don’t see how we can agree to this,” said a member of the creditor group. 

Failure to pay the $42.5m coupon before midnight on Friday would constitute a default on Zambia’s dollar bonds. The debt continued to trade at a heavy discount to its face value on Friday, with a bond maturing in 2027 at 43 cents on the dollar.

Line chart of Price (cents on the US dollar) showing Zambia's international debt is trading at deeply distressed levels

Zambia was already struggling with ballooning debt before the Covid crisis, which further weakened its finances. Its attempts to restructure $12bn of borrowings is seen as a crucial test case for poorer nations trying to find debt relief during the pandemic. It has benefited from a G20 initiative to halt payments to official bilateral creditors this year, but private creditors have been unwilling to participate. 

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Zambia’s government has said it will treat all creditors equally, but bondholders have raised concerns that some Chinese lenders will take part in a debt suspension only if their share of $200m of arrears is cleared first.

Via Financial Times