The Zambian government through the Ministry of Finance has inked a debt restructuring deal with Lazard Freres; one of the most prestigious investment banks in the world. The deal is pegged at US$5M for a 3 year period and has been met with mixed feelings among the general citizenry who felt a local setup with local contextual solutions was needed. However, there was no local firm that applied, with Lazard beating ‘big timers’ in high finance such as Barclays, Deutsche Bank AG, Rothschild and Co, and ABSA among others.
The Zambian government has been in the market for a premier advisor on restructuring of its debt liabilities after what has been a rout on the international markets of its Eurobonds the past few years whose yields have risen to record highs on account of perceived fundamental weaknesses in the economy by investors.
According to official figures released by the Ministry of Finance, Zambia is sitting on US$11.2B of foreign debt at the end of 2019. The recent challenges in the macroeconomy with the country recording a 1.9% GDP growth in 2019; the worst in over two decades has sent yields on the Eurobonds soaring. The Covid-19 pandemic and the resulting negative growth projections have compounded the dire state of affairs.
Yields on US$1.25B Eurobond due in 2027 and the US$750M for 2022 stand at 35.5% and 55% respectively. The simple story behind these soaring yields is that investors have been dumping Zambian bonds in a flight to safety due to vulnerabilities they have assessed could cause the country to not fulfil its debt obligations. In economics, the price of a bond is inversely related to the yield since the other investors getting it cheap will still enjoy the same fixed income of the bond. Therefore as investors dump the Zambian bonds, it sends prices to record lows while yield rise to record highs.
The implication of these high yields, therefore, is that if Zambia wants to tap into the financial markets again, investors will want a minimum of 35.5% for a medium-term bond and 55% for a long term bond. This is one of the efficient mantras of the market that punishes bad behaviour and rewards good behaviour. This punishment on the international markets has further trickled down to affect the exchange rate with the Zambian Kwacha being the second-worst performer since fourth quarter of 2019 after the Mexican Peso according to Bloomberg. The rule of engagement anywhere in the world is that the market will punish you first before the electorate wakes up from their slumber.
It is in this light that the government has decided to fork out US$5M to an elite investment bank in Lazard Freres. Lazard has two businesses, financial advisory and asset management (US$231B under management as of 2019). In order to compete against the high-rollers like Goldman Sachs, Merrill Lynch, Lehman Brothers (before its bankruptcy) and Morgan Stanley all with but-loads of capital to throw around, Lazard had to carve out a niche for itself to thrive in the market and ultimately punch above its weight competing toe-to-toe against the very best. To compete against the highly capitalised rivals; Lazard invested in high power intellect and this is a tradition that still stands to this day with some of the finest investment bankers of our time having made it home at one time. In his book the last tycoons: the secret history of Lazard Freres, William Cohan notes that Lazard has always been about ‘wisdom of great men’.
One other major reason for digging deep into distressed treasury pockets for such advisory apart from enough capacity to handle this delicate job is credibility. This is credibility in the eyes of the two major streets of high finance in the world, London and New York, and also with the International Monetary Fund.
The IMF has especially been hard on Zambia with the institution excluding the country from beneficiaries of the Covid-19 relief loan due to what it called unsustainable debt levels. As far as astute market players can tell, the IMF won’t be taking any calls from Zambia until it sees some semblance of progress in the advisory talks between Lazard, Zambia, and the two major streets. To put it bluntly, there won’t be a bailout package this year or 2021. At best, a breakthrough can be made in 2022, the year of paying the first bullet payment of US$750M.
In conclusion, this journey of a thousand steps to redemption by the Ministry of Finance begins with the first step. The Lazard decision is a top drawer. Next, listen to the professionals. Finally, have the courage to act for the good of the nation. The plan is to come out of this ditch that is getting deeper each passing day by whatever means necessary.