Zambia: The New Darling of Bond Investors?
Last month Zambia held presidential elections, which a group of bond investors followed very attentively. The opposition leader Hakainde Hichilema (UPND) was declared the winner by a landslide (over 1m votes), and the incumbent president Edgar Lungu (Patriotic Front) accepted defeat (after a little bit of complaining) and congratulated Mr Hichilema to ensure transfer of power is seamless and orderly. Zambian bonds rallied on the news and have not looked back since.
This is a turn of events which would have been very hard to imagine in 2020, after the Zambian government failed to make a coupon (interest) payment of $43m on their $3Bn outstanding Eurobonds. Known as a default, this severely restricts the bond issuer’s ability to acquire financing in the future, it is usually a measure of last resort. It’s also a sign of severe financial distress in most cases. After such an event, and some deliberation, bond rating agencies usually downgrade all of the other debt outstanding, and investors panic sell those bonds to avoid further losses. This is exactly what happened last year in November when yields and spreads spiked drastically and prices were as low as 60% of their par value (original value when issued).
But it’s a new dawn and a new day, and investors are effectively banking on the new administration to deal with last years bond default in a much more favourable manner for investors (i.e. they the restructuring of the debt to result in higher recoveries of last year’s losses). HH has already made it clear that he wants a speedy resolution which benefits all parties.
HH’s profile differs from his predecessor in many ways, they are both very well educated with political experience. While Edgar Lungu came through the military ranks and has many authoritarian tendencies, HH seems more liberal and an easy going kinda person. He is a successful business man with a lot of charisma. He also has a very active twitter account, where he keeps the public up to date on what he is doing behind closed door. This is great PR, and i must say the man definitely talks (tweets) a good talk. Below are two of my favourite tweets :-).
Can this man do any wrong? That remains to be seen, one of the his biggest tasks ahead, are the negotiations with the IMF. Prior to the election, officials had been in lengthy talks with the IMF to provide a bail out program for the country. With the new administration in charge, there are likely to be changes in the terms of the program, but broadly speaking all parties (especially bond investors) acknowledge that coming to an agreement sooner rather than late is what is best for the country. Time is of the essence, the government has a $750m Eurobond due next year but says it cannot repay it without the help from the IMF. Something investors are taking with a pinch of salt at this moment in time.
As long as the music is playing, you’ve got to get up and dance, and thats precisely what Zambia authorities did last week. They raised new money by issuing bonds worth 2.5bn Kwacha ($150mn) at a yield (interest) of 25%, the demand for those bonds by investors far outweighed what was available. Investors put in orders of roughly 10x the outstanding amount now thats impressive and very telling about how fast investor sentiment can change. Whats even more impressive is that the bonds issued are in local currency, usually investors demand a premium for local currency bonds as there is an added currency risk, but the Zambian currency (Kwacha) has been a strong upward trend vs the dollar this year.
It’s good to see that things have turned out for the good in Zambia. African government bond prices often sell off disproportionally during economic shocks, and also tend to take longer to recover.
HH is promising a lot, and time will tell how much of his promises will be delivered.
Enjoy your Sunday afternoon.