Ethiopia investors plan legal action as row over $1 billion bond overhaul escalates

By Duncan Miriri and George Obulutsa

NAIROBI, Feb 2 (Reuters) - A key investor group in Ethiopia's sole international bond said on Monday it planned to take legal action after the country's bilateral creditors blocked an initial agreement with the government on how to restructure the debt.

Ethiopia said on Friday it would reopen negotiations with investors on the terms of restructuring the $1 billion bond after the Official Creditors Committee, chaired by China and France, said the draft deal did not meet the Comparability of Treatment principle under the G20 restructuring initiative.

"The Committee (of bondholders) considers the determination, led by the OCC's co-chairs France and China, to be completely unreasonable," the group of investors said in a statement.

Under the G20's Common Framework aimed at streamlining the process for struggling states to overhaul their debt, Comparability of Treatment requires commercial creditors to take similar losses to their official counterparts.

Ethiopia, which defaulted on the bond in December 2023, formalised a restructuring deal with official creditors last July, paving the way for talks with bondholders. This in turn led to the initial deal announced in early January.

Under the terms of that deal, bondholders would take a 15% writedown on the principal amount through an exchange for a new $850 million bond maturing in mid-2029. It also set out the creation of a value recovery instrument (VRI) that would link payouts to the value of Ethiopia's exports.

Contingent debt instruments, including VRIs, have become popular in recent years as a means to speed up restructurings and have been used in debt overhauls in Sri Lanka, Ukraine and Zambia.

IMPROVING MACROECONOMIC CONDITIONS

The OCC's secretariat told Reuters on Sunday that due to improving economic fundamentals in Ethiopia, the inclusion of the contingent debt instrument would lead to "a vastly diverging effort between bondholders and the official creditors".

"The OCC will continue to support the Ethiopian authorities in their efforts to reach an agreement comparable to the OCC's debt treatment, and stands ready to engage in good faith with all parties to reach such an outcome," it said.

Heidi Chow, executive director of campaign group Debt Justice, supported the OCC rejection of the deal with bondholders, saying it "would have forced the people of Ethiopia to pay far too much, putting essential public services at risk".

However, the ad hoc bondholder committee, which represents more than 45% of investors in the bond, said the OCC's move would cause delays and uncertainty when all parties would be best served by the ability to secure a timely resolution.

While stressing its wish to engage constructively with Ethiopia's government, the group said it had no option now but "to take legal action in the English court to enforce payment of the outstanding principal and interest due".

Separately, the International Monetary Fund, which provides calculations on Ethiopia's debt levels, raised projections for export earnings and reserves.

"Exports are projected to support stronger than anticipated balance of payments outcomes," the IMF said in a report late on Friday, citing earnings from gold and coffee exports.

Ethiopia's bond XS1151974877=TE shed close to half a cent on Monday, to bid at 105.08 cents on the dollar, Tradeweb data showed, extending its losses after the official creditors' announcement on Friday.

Meanwhile, fears of a renewed conflict inside Ethiopia have risen after clashes between regional and national forces last week in the western Tigray region, which emerged in 2022 from a two-year conflict that killed hundreds of thousands of people.