Ethiopia’s Debt Restructuring Dilemma: Bondholders Reject 18% Haircut

(Bloomberg) — Investors holding Ethiopia’s defaulted dollar bonds have rejected the debt-restructuring terms proposed by the government for the $1 billion issue.

An ad hoc committee representing holders of the sovereign notes maturing Dec. 2024 said Ethiopia’s proposal of an 18% haircut on the bond’s principal is “wholly inconsistent” with the nation’s economic fundamentals.

“The committee does not consider the illustrative terms to be a reasonable starting point for negotiation,” it said in a statement Thursday.

The government spelled out its offer Tuesday on a call with bondholders, even though the ad hoc group, which holds over 40% of the bonds, had already dismissed accepting a haircut in August. The group said at the time that any reductions to the principal amount that the Horn of Africa nation owes creditors were unnecessary.

Morgan Stanley Asset Management, Farallon Capital Management LLC and VR Capital Group Ltd. are part of the group, according to people familiar with the matter, who asked not to be named because the composition of the committee is private.

The defaulted December 2024 dollar bonds fell for a second day, trading at 77.3 cents on the dollar, the lowest level since mid-August.

Ethiopia defaulted on the debt last December. In July, it secured a $3.4 billion loan from the International Monetary Fund and now the government needs to renegotiate what it owes to bondholders, as well as to country-level creditors such as China and France, which are grouped together in an official creditor committee, or OCC.

The country is using the Group of 20’s Common Framework guidelines to restructure its external debt, which includes $12.4 billion owed to bilateral creditors. Under the framework, the IMF’s debt sustainability analysis, or DSA, lays out the economic parameters dictating how much relief lenders need to provide, and forms the basis for negotiations with all creditor groups.

“Based on our assessments, the 18% haircut delivers more relief than what the DSA requires,” said Thato Mosadi, a fixed-income strategist at Jefferies. “We think bondholders have scope to negotiate better terms. This, together with a much tighter exit yield, suggests there is a good amount of upside to the bonds.”

In its presentation to global investors, Ethiopia said it was inviting them to negotiate in parallel with the OCC process. However, the group of bondholders said that the “lack of transparency” in the debt rework between the country and its bilateral creditors “could hinder Ethiopia from achieving a fair outcome for all of Ethiopia’s stakeholders” since the OCC represent a “significant majority” of the debt that’s up for restructuring.