Zambia Eurobond Plan Wins IMF Support as Yields Reach Record

The International Monetary Fund backed plans by Zambia, Africa’s biggest copper producer, to sell a second Eurobond even as yields on existing debt surged to a record.

“Given Zambia’s relatively modest overall debt level, strong economic growth, and large investment needs,” Tobias Rasmussen, the IMF’s resident representative for the country, said in an e-mailed response to questions on Feb. 3. “A sizable Eurobond issuance would make sense” provided market conditions are favorable and proceeds invested in projects that will support the economy, he said.

The southern African country hired Deutsche Bank AG and Barclays Plc as joint bookrunners for its second international debt sale. Yields on Zambia’s $750 million of Eurobonds have climbed 289 basis points, or 2.89 percentage points, since they were they sold in September 2012 to 8.05 percent as of 12:45 p.m. in London. Rates on the bonds reached a record high 8.14 percent on Feb. 3. The securities have lost 4.3 percent this year, the worst-performing dollar debt on the continent after South Africa, according to Bank of America Merrill Lynch indexes.

Zambia plans to spend over $600 million on developing power, road and rail infrastructure this year, as President Michael Sata’s government accelerates development to pull the population out of poverty. Fitch Ratings lowered Zambia’s credit by one step in October to B, five levels below investment grade, citing a ballooning budget deficit.

The state plans to tap offshore lenders for $1 billion this year and will also borrow about $630 million locally, according to Finance Minister Alexander Chikwanda’s Oct. 11 budget speech.

Rates Climbing

As the government has increased its local debt issuance, yields on Treasury bills and bonds have climbed. Rates on Zambia’s benchmark 364-day Treasury bills climbed to 15.75 percent, reaching the highest level in two years on Dec. 12. At the latest auction on Jan. 23, yields fell to 15.4 percent.

Government has limited commercial interest rates to 18.75 percent and rising yields for government debt has made private loans less attractive, Rasmussen said.

“If banks are able to obtain almost the same interest rate from Treasury bills as they get from making loans to the private sector then they will naturally start placing more of their funds in government securities,” he said.

Before it's here, it's on the Bloomberg Terminal.