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Zambia faced a day of reckoning on Monday, as it returned to the international debt markets 18 months after its debut Eurobond issue became emblematic of an overextended rally across emerging market credits.
The sovereign had to offer a generous new-issue premium to get investors on board and ended up pricing its new USD1bn 10-year bond at a yield that was 300bp higher than that achieved on its inaugural issue in September 2012.
At the time, with 10-year US Treasuries yielding around 1.75%, investors’ hunt for yield and differentiation allowed the copper-exporting country to price its first 10-year Eurobond at a staggering 5.625% yield, 10bp inside Spain’s sovereign curve.
Since then, however, a marked deterioration of Zambia’s fiscal position, combined with weaker copper prices and a 95bp widening of 10-year US Treasury yields, set the grounds for a very different kind of trade.
Having traded sharply down since they were issued, Zambia’s outstanding 2022s were bid at a cash price of 85.25 on Monday morning, equivalent to a yield of 7.79% and a Z-spread of 528bp, according to Tradeweb data.
Leads opened books on the new trade with initial price thoughts of 8.75%–8.875%, later revised to the final range of 8.75% area (plus or minus 12.5bp). After collecting orders worth US$4.3bn, the sovereign was able to price the deal at the tight end of that range, equivalent to a spread of roughly 580bp over swaps.
In a striking representation of the extent to which Zambia’s credit story has weakened against a sustained rally across peripheral European bonds, the African sovereign priced its new deal 544bp wide of Spain’s 10-year benchmark.
The leads argued that once the extension of the curve is taken into account, the new-issue premium was 35bp–40bp.
A rival banker said, however, the new issue concession was closer to 50bp. “It is more down to the credit than to Africa falling out of bed,” he added.
For investors, the all-in yield offered a much more realistic depiction of Zambia’s macroeconomic fundamentals.
“We thought the price it came at better reflected the risks of the country compared to the deal in 2012,” said a UK portfolio manager who bought the new bonds but did not participate in the debut trade. “The previous deal was issued into a very robust market. This time around Zambia achieved greater engagement with institutional investors in terms of capacity and size of orders” said John Wright, CEEMEA syndicate at Barclays, which co-led the deal with Deutsche Bank.
Final allocations reveal a similar distribution to the 2012 trade, with fund managers ending up with 84%, followed by banks and private banks with 9%, insurance and pension funds with 6% and others with the remaining 1%. In terms of geography, accounts in the US bought 56%, followed by the UK at 7%, the rest of Europe 14%, Asia 2% and others 1%.
The bonds traded up by 1.5pt on the break on Tuesday to 101.36 and were hovering around the same level on Thursday morning, according to Thomson Reuters data.
Zambia is rated B1/B+/B.
