FITCH Ratings has downgraded Zambia’s credit rating to ‘C’ from ‘CC’, meaning the country is in imminent default with little prospect of recover.

Fitch has also downgraded Zambia’s rating on its senior unsecured foreign-currency bonds, mainly triggered by the Zambian government’s request to suspend debt interest payments on its US $3 billion worth of Eurobonds.

In a press release issued via Fitch’s Hong Kong bureau, Thursday, Fitch Ratings downgraded Zambia’s long-term foreign-currency issuer default rating (IDR) to ‘C’ from ‘CC’, while equally downgrading the ratings on Zambia’s senior unsecured foreign-currency bonds included in the “consent solicitation” to ‘C’ from ‘CC’, which includes all the foreign-currency bonds rated by Fitch.

This means that Zambia’s credit rating has significantly dropped on the back of the Zambian government’s appeal to bond holders to suspend debt interest payments on all its US $3 billion worth of Eurobonds.

According to Fitch, the development has now signalled Zambia’s imminent loan default, being the first African country to ask for debt suspension on its Eurobond.

“…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,” Fitch warned.

“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.”

Fitch downgraded Zambia’s rating to ‘CC’ on April 16 to indicate the increasing likelihood of a default event as a result of constrained external liquidity was exacerbated by the shock from the Coronavirus pandemic.

In a major announcement, Tuesday, Secretary to the Treasury Fredson Yamba conceded that the Zambian government was under severe fiscal stress, which necessitated an urgent appeal to bond holders to suspend Eurobond interest debt payments, effective October 14.

“The Ministry of Finance has announced a Consent Solicitation to holders of its (i) US $750 million, 5.375 per cent; notes due 2022; (ii) US $1,000,000,000, 8.500 per cent; notes due 2024 and (iii) US $1,250,000,000, 8.970 per cent; notes due 2027 to request the suspension of debt service payments for a period of six months from October 14, 2020, effectively covering the upcoming three coupon payments due on on 14 October, 2020, 30 January, 2021, and 20 March, 2021 on the respective notes. The Republic of Zambia is confronted with a very challenging macroeconomic and fiscal situation aggravated by the COVID-19 crisis that has severely affected the country’s public finances,” Yamba said in the statement.

“A combination of declining revenues and increased unbudgeted costs caused by the COVID-19 pandemic have resulted in a material impact on the government’s available resources to make timely payments on its indebtedness leading to increasing debt servicing difficulties. This is the reason why the Republic of Zambia has taken the decision to apply for the G20 Debt Service Suspension initiative in August, 2020, and is requesting similar debt service suspension from its commercial creditors, including note-holders.”

Zambia issued three Eurobonds worth US $750 million, US $1 billion and US $1.25 billion in 2012, 2014 and 2015, with the US $750 million and US $1 billion bonds maturing in 2022 and 2024, respectively.