Update on Agreement-In-Principle with Bondholders

Zambia (Republic of) (MoF)

20 November 2023

 

NOT FOR DISTRIBUTION IN ANY JURISDICTION IN WHICH SUCH DISTRIBUTION WOULD BE PROHIBITED BY APPLICABLE LAW

The Government of the Republic of Zambia announces that a restructuring agreement with its Eurobond holders cannot be implemented at this time

The Government of the Republic of Zambia (the "Government") announces today that, following the agreement in principle ("AIP") reached with the Steering Committee of the Ad Hoc Group of Bondholders (the "Steering Committee") on 26^th October, the authorities and their advisors conducted consultations with the country's Official Creditor Committee (the "OCC") and the staff of the International Monetary Fund (the "IMF Staff").

The OCC, through its Co-chairs, concluded that Comparability of Treatment would not be achieved in the Base Case scenario, although would be achieved in the Upside Case scenario. The OCC stated that the AIP, despite similar present value concessions to the deal agreed between the Government and the OCC, was not in compliance with the Comparability of Treatment in the Base Case scenario due to a shorter extension of the duration and lower contribution to the closing of the balance of payment financing gap during the IMF program period. The fact that bondholders have agreed to nominal face value concessions ("haircut"), while the OCC members have not, is not considered a mitigating factor since the haircut is not part of the criteria listed in the G-20 Common Framework to assess Comparability of Treatment.

In addition, the IMF Staff assessment showed that the AIP with bondholders would breach the DSA targets. The debt service-to-revenues ratio would reach 16.7 percent in 2025, 2.7 percentage points higher than the 14 percent target, while the present value of the debt stock-to-exports ratio would be marginally breached (by 1 percentage point), at 85 percent in 2027.

In light of these reservations, the Government and the Steering Committee continued their engagement over the past week and discussed possible amendments to the AIP. During these discussions, the Steering Committee made a revised proposal attached hereto as Annex A (the "Revised Proposal"), which the Government has duly considered. The Government views the Revised Proposal as compatible with the objective of restoring debt sustainability and with the principle of Comparability of Treatment.

In parallel, the authorities and their advisors also engaged with the IMF Staff and the OCC Secretariat.  The IMF Staff advised the Government that the Revised Proposal, if implemented, would be compatible with the IMF program parameters and debt sustainability targets.

 In a meeting on Friday 17^th November, OCC members concluded that the Revised Proposal was not comparable with the debt treatment granted to Zambia by the OCC. The OCC Co-Chairs further advised that there was no consensus among OCC members as to the magnitude of additional PV concessions that would be required from Bondholders in the Base Case to comply with the Comparability of Treatment principle.

After being notified of the outcome of the consultations with the OCC, the Steering Committee confirmed that any additional concession on their part was not possible. In the Steering Committee's view, the Revised Proposal met the IMF program parameters and the debt sustainability targets and met the Comparability of Treatment criteria as it already delivered a present value effort higher than the OCC by 2 percentage points in the Base Case and 6 percentage points in the Upside Case.[1]

Notwithstanding a comprehensive agreement on the Revised Proposal between the Government and the Steering Committee, as well as an agreement with the IMF Staff in relation to the program parameters and debt sustainability targets, the Government currently does not have the support of the OCC and is unable to move forward at this time with the implementation of the restructuring with the Bondholders.

The Government regrets that discussions with bondholders have not yet yielded an agreement that could be supported by all of its stakeholders.  The Government is committed to continuing its efforts to find a satisfactory solution that avoids further costly delays in completing the country's debt restructuring. In this context, the Government intends to continue discussions in good faith with all relevant parties on how it can reach a successful and comprehensive debt restructuring.

This announcement is made by the Government of the Republic of Zambia and constitutes a public disclosure of inside information under Regulation (EU) 596/2014 (16 April 2014).

ANNEX A:  REVISED PROPOSAL

The "observation period" of the trigger mechanism is to extend over the period January 2026 to December 2028, with assessments to be made at each semiannual payment date with enhanced terms applicable from the date of the trigger and payable from the next payment date. The agreement in principle assumes the Upside Case treatment is triggered irrevocably in case one of the two below conditions is met during the "observation period."

•     Zambia's Composite Indicator[2] meets or exceeds a score of 2.69 for two consecutive semi-annual reviews, paving the way for an upgrade to medium debt-carrying capacity.

•     The 3-year rolling average of the USD exports and the USD equivalent of fiscal revenues (before taking into consideration grants) exceeds the IMF's projections as laid out in the First Review of the IMF's Extended Credit Facility Arrangement released in July 2023.[3]

The financial features of the Base Case and Upside Case Treatment are presented in the next page. The financial structure is composed of two bonds, Bond A and Bond B. In case the Upside Treatment is triggered, financial features of Bond B will be improved through an accelerated payment schedule and higher interest rates. The financial terms of Bond A remain unchanged in both the Base Case and Upside Case treatments.

Notes: (i) In addition, the execution of the transaction would involve the introduction of a consent fee of 1.5% of the original face value amount of bonds (US$ 3bn) to incentivize participation to the exchange offer; (ii) the total amount amortized under the "Upside Case" Treatment for the Bond B is not equal to the Face Value due to the PIK coupons, which represents a total of ~USD 329m capitalized coupons over 2026-2031.

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This press release does not constitute an offer of securities for sale in the United States, and the securities (if issued) will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act") or the securities laws of any state of the United States and they may not be offered or sold within the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state or local securities laws. This press release does not constitute an offer of securities for sale, or the solicitation of an offer to buy any securities, in any state or other jurisdiction in which any offer, solicitation or sale (if made) would be unlawful. Any person considering making an investment decision relating to any securities must inform itself independently based solely on an offering memorandum to be provided to eligible investors in the future in connection with any such securities before taking any such investment decision.

This announcement is directed only to beneficial owners of the Government's bonds who are (A) "qualified institutional buyers" within the meaning of Rule 144A under the Securities Act or (B) outside the United States in offshore transactions in compliance with Regulation S under the Securities Act, that may lawfully participate in the Restructuring in compliance with applicable laws of applicable jurisdictions.

No offer of any kind is being made to any beneficial owner of bonds who does not meet the above criteria or any other beneficial owner located in a jurisdiction where the offer would not be permitted by law.

Forward-Looking Statements

All statements in this press release, other than statements of historical fact, are forward-looking statements. These statements are based on expectations and assumptions on the date of this press release and are subject to numerous risks and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Risks and uncertainties include, but are not limited to, market conditions and factors over which the Government has no control. The Government assumes no obligation to update these forward-looking statements and does not intend to do so, unless otherwise required by law.

Notice to Investors in the European Economic Area and the United Kingdom

Notice to EEA retail investors.  The announcement contained in this press release is not being directed to any retail investors in the European Economic Area ("EEA").  As a result, no "offer" of new securities is being made to retail investors in the EEA.

This announcement is only directed to beneficial owners of Bonds who are within a Member State of the European Economic Area or the United Kingdom (each, a "Relevant State") if they are "qualified investors" as defined in Regulation (EU) 2017/1129 (as amended or superseded, the "Prospectus Regulation").

The securities are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in a Relevant State. For these purposes, a "retail investor" means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, "MiFID II"); (ii) a customer within the meaning of Directive (EU) 2016/97 (as amended), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; or (iii) not a qualified investor as defined in the Prospectus Regulation. Consequently no key information document required by Regulation (EU) No 1286/2014 (as amended, the "PRIIPs Regulation") for offering or selling securities or otherwise making them available to retail investors in a Relevant State has been prepared and therefore offering or selling securities or otherwise making them available to any retail investor in a Relevant State may be unlawful under the PRIIPs Regulation. References to Regulations or Directives include, in relation to the UK, those Regulations or Directives as they form part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 or have been implemented in UK domestic law, as appropriate.

United Kingdom

For the purposes of section 21 of the Financial Services and Markets Act 2000, to the extent that this announcement constitutes an invitation or inducement to engage in investment activity, such communication falls within Article 34 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), being a non-real time communication communicated by and relating only to controlled investments issued, or to be issued, by the Republic of Zambia.

Other than with respect to distributions by the Republic of Zambia, this announcement is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Promotion Order, (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any securities may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This announcement is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which the announcement relates is available only to relevant persons and will be engaged in only with relevant persons.

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[1] Without accounting for the consent fee element, which final payable amount would only be known upon Zambia completing the exchange.

[2] See https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/02/14/pp122617guidance-note-on-lic-dsf for more details on the Composite Indicator.

[3] See https://www.imf.org/en/Publications/CR/Issues/2023/07/13/Zambia-2023-Article-IV-Consultation-First-Review-Under-the-Extended-Credit-Facility-536340

 

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