Fitch Ratings – Hong Kong – 24 Sep 2020: Fitch Ratings has downgraded Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘C’ from ‘CC’. Fitch has also downgraded the ratings on Zambia’s senior unsecured foreign-currency bonds included in the “consent solicitation” to ‘C’ from ‘CC’. This includes all of the foreign-currency bonds rated by Fitch.
Fitch typically does not assign Outlooks or apply modifiers for sovereigns with a rating of ‘CCC’ or below. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The downgrade reflects Fitch’s view that a sovereign default will follow the “consent solicitation” issued by the Zambian government on suspending debt service payments on its three outstanding global bonds. A suspension in payments, if agreed to by bondholders, would constitute a distressed debt exchange (DDE) in Fitch’s view. The authorities have indicated that they will continue to make debt service payments on outstanding Eurobonds if an agreement is not reached. However, Fitch judges that there is a high risk of a missed debt payment over the forecast horizon.
On 22 September, the government of Zambia issued a “consent solicitation” to holders of three global bonds, requesting a suspension of debt service payments for six months from 14 October 2020, effectively covering the upcoming three coupon payments due on 14 October 2020, 30 January 2021, and 20 March 2021 on the respective bonds.
Fitch deems this formal request to be the initiation of a default-like process, consistent with a ‘C’ rating. Should majorities of creditors agree to the request at the thresholds specified in collective action clauses, the payment standstill would constitute a DDE under Fitch’s criteria given that it entails a material reduction in terms and is needed to avoid an outright default.
The sovereign’s already constrained external liquidity was exacerbated by the shock from the coronavirus pandemic. Fitch downgraded Zambia’s rating to ‘CC’ on 16 April to indicate the increasing likelihood of a default event as a result of these pressures.
ESG – Governance: Zambia has an ESG Relevance Score of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Zambia has a medium WBGI, in the 38th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
ESG – Creditor Rights: Zambia has an ESG Relevance Score (RS) of 5 for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The downgrade of Zambia’s rating reflects Fitch’s view that a default event is imminent.