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Zambia Set to Pay More in Eurobond Sale as Kwacha Slides

Zambia, Africa’s second-largest copper producer, is set to pay more to sell the first Eurobond from the continent in 2014 after the nation’s currency slid 9.6 percent this year.

The country may price the benchmark-sized bonds, its first since 2012, to yield between 8.75 percent and 8.875 percent, according to a person with knowledge of the offering, who asked not to be identified because they weren’t authorized to speak publicly. This compares with a coupon rate of 5.375 percent for the $750 million note sold in September 2012.

The landlocked nation, which relies on copper for about 70 percent of its export earnings, said in October it may issue as much as $1 billion of Eurobonds, hiring Deutsche Bank AG (DBK) and Barclays Plc in January to lead the sale. Prices for copper fell 11 percent in the past 12 months, adding pressure on government finances as the budget deficit widened to 8.5 percent of gross domestic product in 2013 from an earlier estimate of 4.3 percent, according to the Finance Ministry.

Zambia, which has a B+ rating that puts it four levels below investment grade by Standard & Poor’s, increased its benchmark interest rate to a record 12 percent on March 28 from 10.25 percent to stem a slide in the currency.

Context Changed

“The issuance in 2012 was supported by the bullish market environment at the time,” Samir Gadio, a London-based emerging-markets strategist at Standard Bank Group Ltd., said in an e-mailed response to questions. “The context has changed since. Zambia’s external perception and fundamentals have deteriorated since, so there was no way they would replicate the pricing.”

The kwacha gained 0.2 percent to 6.14 per dollar by 12:32 p.m. in Lusaka, paring its 2014 drop, which is the most among 24 African peers tracked by Bloomberg after Ghana’s cedi. The yield on Zambia’s dollar-denominated debt due September 2022 was little changed at 7.8 percent. It’s dropped 53 basis points from this year’s high reached on March 20. Copper for delivery in three months declined less than 0.1 percent to $6,617.25 a metric ton.

Six calls made to three phone numbers listed on the Lusaka-based Ministry of Finance’s website went unanswered or didn’t connect. Two calls made to the mobile phone of Felix Nkulukusa, permanent secretary at the ministry, didn’t connect.

Zambia’s issuance will be the continent’s first since the Federal Reserve in January began scaling back stimulus that drove demand for emerging-market assets. While yields on African dollar debt climbed 12 basis points in the first month of the year, they have dropped 65 basis points to 5.39 percent since reaching a 2014 high on Feb. 3, according to JPMorgan Chase & Co. indexes.

Zambia wants “to take advantage of the more supportive risk environment in the credit market in recent weeks,” Gadio said. A price to yield of between 8.75 percent to 8.875 percent “is cheap enough to facilitate the issuance of the bond,” he said.

To contact the reporters on this story: Lyubov Pronina in London at lpronina@bloomberg.net; Jaco Visser in Johannesburg at avisser3@bloomberg.net

To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net Emily Bowers, Gordon Bell, Sarah McGregor

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