Bondholders prepare to sue Ethiopia over $1bn debt default

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Investors are preparing to sue Ethiopia over its $1bn bond default after the country’s official creditors opposed a deal to restructure the debt.

A committee of private-sector holders of the bonds issued by Africa’s second most populous nation said on Monday that bilateral lenders led by China and France had been “completely unreasonable” and were forcing them to go to court three years after the country defaulted.

Ethiopia’s finance ministry announced a deal last month to convert its only international bond into a new bond with payouts linked to its export performance, after already making deals to restructure more than $8bn in official loans in which creditors offered $3.5bn of debt relief.

But last week the ministry said official creditors viewed the bondholder deal as unequal with the terms agreed for their bilateral loans, upending the deal.

Official lenders said “favourable macroeconomic perspectives” for Ethiopia meant that the deal “is likely to result in a very low restructuring effort from the bondholders” but did not disclose further details.

Last month’s deal would deliver higher payouts to bondholders if Ethiopia’s export revenues were to rise above specified levels.

Ethiopia’s bond has been trading at about 105 cents on the dollar, up from 50 cents in the midst of the civil war in the country’s Tigray region in 2022.

The bondholder committee, which includes hedge funds VR Capital and Farallon Capital Management, said “they have been left with no other option but to take legal action in the English court to enforce payment” after the rejection by official lenders.

The threat of legal action would be the first time that a sovereign debt restructuring under the Common Framework, a G20-endorsed but troubled process for corralling creditors to poor nations, has gone to the courts.

“The framework was established to offer a collaborative, transparent and predictable process for sovereigns seeking a timely and co-ordinated restructuring. In practice, however, the process has proven to be opaque, unpredictable and capriciously wielded,” the bondholder committee said.

The Common Framework was designed to ensure that debt restructuring talks would more effectively include Chinese state-owned banks, bondholders and other creditors outside the traditional Paris Club of official lenders, after a spate of defaults during the pandemic.

But it became a byword for delay and friction in resolving defaults such as those of Ghana and Zambia — which also came close to legal action by bondholders — and Ethiopia has been one of the last outstanding cases.

The committee said it was still willing to engage “constructively” with the Ethiopian government and “has no desire to see Ethiopia languish in default, which is to the detriment of all parties”.

Legal action over the bonds would last several months before a court judgment and would consolidate the bondholders’ claim to include past-due interest in the restructuring, making it harder to reach an agreement among all creditors.

The dispute reflects the fallout from a recent surge in exports by Africa’s biggest producer of arabica coffee, which is also rising up the ranks of the continent’s gold producers.

Ethiopia and the bondholders agreed in principle to convert the $1bn bond, originally due for repayment in 2024, into $850mn of new debt maturing in 2029.

This 15 per cent “haircut” would be followed by further cuts in payments to bondholders if Ethiopia’s exports missed IMF forecasts. But bondholders would stand to receive payouts from a so-called “value recovery instrument” if exports did better.

Similar instruments linked to GDP or other economic indicators have proliferated in recent deals for debtors including Zambia and Suriname.

Ethiopia’s deal would offer annual payouts worth 2.5 per cent of the export outperformance over IMF forecasts from 2028 to 2037, subject to a $35mn cap and Ethiopia’s international reserves meeting key levels.

“Official creditors were right to reject the deal with bondholders, which would have forced the people of Ethiopia to pay far too much, putting essential public services at risk,” said Heidi Chow, executive director of Debt Justice, the UK charity.