(Bloomberg) -- Zambia has agreed to restructure $3 billion in eurobonds, clearing a key hurdle that’s delayed its three-year effort to escape debt default with implications for other nations seeking creditor deals.

“History has been made! We are pleased to announce the agreement with our eurobond holders,” Zambia President Hakainde Hichilema said in a statement on X.

Monday’s announcement marks a much-needed success for the Group of 20’s Common Framework, which was unveiled in 2020 to help poor countries overhaul borrowings from all creditors including sovereigns, bondholders and commercial banks, but has been criticized for taking too long. 

It also comes after two false starts between Zambia and its bondholders late last year, which called into question the framework.

Investors greeted the news of the agreement with the bondholder steering committee warmly. 

Zambia’s dollar eurobond maturing 2027 extended earlier gains to advance 2 cents on the dollar to 74.576 cents as they digested the announcement. That’s the biggest one day gain since Feb. 26, lifting the price to its highest level since May 2022.

The agreement, which follows a pact with official creditors last year, only leaves a deal with commercial lenders outstanding. These include Jiangxi Bank Co. and Industrial and Commercial Bank of China Ltd., which are owed hundreds of millions of dollars.

In a key technical detail, the finance ministry separately said it had received confirmation that the terms of the eurobond agreement were compatible with the official creditor committee’s assessment of comparability of treatment.

A previous November deal with Zambia’s eurobond holders was rejected by official creditors including China because they didn’t accept they were being treated comparably, a key tenant of the Common Framework.

IMF Blessing

“We welcome the agreement between Zambia and bondholders to restructure the eurobonds,” said a spokesman for the International Monetary Fund in Washington. “The agreement is consistent with the parameters of the IMF program.”

As Africa’s first nation to default on pandemic-era debt, Zambia is viewed as a test case for the framework and the breakthrough carries lessons for other nations using it to negotiate with creditors. These include Ghana, which is currently talking with investors as it seeks to rework about $13 billion owed to bondholders.

The deal marks the first of its kind under the Common Framework, where Chinese state-owned creditors have agreed to what a comparable restructuring would look like between their debts and dollar bonds.

Bondholders prefer to get paid their money earlier and take haircuts in return, while Chinese lenders tend to extend loan maturities at lower interest rates while ultimately getting paid back the full principal amount

Hefty Haircut

Zambia said that bondholders would forgo about $840 million of their claims, and provide cash flow relief of approximately $2.5 billion during the IMF program period. That translates to an haircut of 21.6% of total nominal face value of the bonds, including past due interest. Under the previous deal that the official creditors rejected, bondholders would’ve taken a 16% cut.

Investors will be invited to exchange their old eurobonds into two new government bonds — Bond A for $1.7 billion and Bond B for $1.35 billion. 

The bond exchange should be complete around end-May or early June, according to a person close to the committee of holders, who asked not to be named.

The deal also includes a “base case” and “upside case” affecting the financial structure of the agreement if it is triggered by the performance of the Zambian economy. The ministry said the respective weighted average maturity will be 15 years and eight years under the base case and upside case.

“As a result, the present value concessions from the bondholders at current market rates will be significant,” it said. “However, these concessions are necessary given the constraints faced by Zambia and are essential to achieve the relief required under the Debt Sustainability Analysis to restore financial stability to the country.”

--With assistance from Colleen Goko, Eric Martin and Selcuk Gokoluk.

(Updates with timing of likely completion of bond swap in 16th paragraph.)

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