(Bloomberg) — Ethiopia appears poised to miss an interest payment due later Monday on its December 2024 dollar bond, becoming the latest emerging market country to default on its debt.
The country’s finance ministry said Friday it was “unable to pay” the $33 million coupon due to the country’s “fragile external position.” She added that “restricted discussions” she had had with a group of bondholders had so far been unsuccessful.
However, the Ethiopian government has proposed a restructuring that would avoid capital losses for bondholders in exchange for a lower coupon. That helped push the price of the $1 billion Eurobond due December 2024 up by one cent, to 62.8 cents as of 10 a.m. in New York. The additional yield premium required by investors to hold Ethiopian debt remains at 5,442 basis points over Treasuries, according to data from JPMorgan Chase & Co. Spreads above 1,000 basis points are considered securities in difficulty.
“Bonds are gaining ground, as the initial conditions proposed by the government are basically in line with current market prices and there is some hope of a better outcome after the negotiations,” said Thys Louw, portfolio manager at Ninety One UK Limited. He does not hold the bond.
The bond extended gains after EMTA, the emerging markets trade association, issued a statement recommending that Ethiopia’s 2024 bonds entered into on or after Dec. 11 trade “flat” unless otherwise agreed. This means that buyers of the security will receive the interest each time it is paid.
Read more: Ethiopia to suspend debt payments and restructure Eurobonds
A default would put Ethiopia among the ranks of a growing number of developing countries that have defaulted on their Eurobonds in recent years, including Zambia, Ghana and Sri Lanka. Tunisia, Pakistan and Bolivia are also considered at risk, as the bond market valuation suggests.
The Horn of Africa country still has a 14-day grace period before being considered in default, according to the bond’s prospectus.
The government informed bondholders on Friday that the significant decline in foreign exchange reserves “inevitably impacts the ability of the Ministry of Finance to service impending external borrowings.”
In its restructuring counterproposal, the government asked bondholders to extend the amortization maturity from July 2028 to January 2032 and reduce the coupon to 5.5% from the current 6.625%. However, the face value must remain at $1 billion, meaning creditors will not need to swallow a so-called haircut on their holdings.
This proposal involves a reduction in the present value of the debt by around 33%, using a discount rate of 12%, according to Søren Mørch, portfolio manager at Danske Bank Asset Management, which holds the bond.
Default value “useless”
An ad hoc committee of bondholders said it viewed the decision not to make the payment as “both unnecessary and unfortunate.”
Ethiopia is seeking to renegotiate its obligations through the Group of 20 Common Framework, which began to gain momentum after Zambia and Ghana made progress in restructuring their debts. This helps coordinate debt relief from public and private lenders, to set standards for debt treatment.
Ethiopia had already reached an agreement in principle with its bilateral creditors last month to suspend debt payments, after seeking to rework its commitments since 2021 as a civil war soured investor sentiment and undermined economic growth .
Time is now running out to reach emergency financing and an economic program with the International Monetary Fund, which will define the parameters of a debt restructuring. Its Paris Club creditors have set a March 31 deadline to approve the program, or they could declare null and void the debt service suspension agreed to last month.
“It is difficult to move forward until there is an IMF program and a debt sustainability agreement. So we should reach an agreement no earlier than the middle of next year,” said Kaan Nazli, portfolio manager at Neuberger Berman Asset Management, which holds the Ethiopian bonds.
The government will hold a conference call with global investors this week during which it plans to “present a proposal it could launch regarding the Eurobond”, according to the ministry’s statement.
The ministry said the Ethiopian government had proposed the following conditions to bondholders during recent restricted discussions:
- A four-year amortization period, from July 2028 to January 2032
- A nominal rate of 5.5%, of which 2.5% would be capitalized over the planned four-year IMF program period.
- The bondholders’ committee “continues to remain open to constructive and proactive engagement with the Ethiopian authorities.”
(Updates with bond movement in third paragraph, adds EMTA flat trading recommendation in sixth paragraph)
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