Ethiopia has moved closer to completing the restructuring of its $1 billion Eurobond after its official creditors approved a preliminary agreement between the government and private bondholders, while warning that a new warrant included in the deal could create unequal treatment among creditors.

The Official Creditor Committee (OCC), co-chaired by France and China, said the agreement in principle reached between Ethiopia and bondholders in June complies with the principle of comparable treatment and the terms of the debt restructuring memorandum agreed with the government.

The approval allows Ethiopia to proceed with implementing the proposed restructuring of its Eurobond, which matured in 2024. The country defaulted on the bond in 2023 after earlier attempts to restructure it failed.

However, the OCC raised concerns over a New Money Warrant included in the agreement with bondholders.

The warrant gives investors the option to participate in a future Ethiopian bond issuance of up to $1 billion at a market-linked interest rate. Ethiopia would also have the option to settle the warrant in cash, subject to a cap of $90 million.

Official creditors warned that if the warrant ultimately provides bondholders with benefits beyond those available to bilateral creditors, they could be required to adjust the terms of their own debt restructuring.

The OCC said it would closely monitor how the warrant is implemented and assess whether it results in benefits that could undermine the principle of comparable treatment.

The warrant was reportedly a key element in breaking the deadlock between Ethiopia and its private creditors. However, the OCC stressed that its acceptance of the instrument does not establish a precedent for future debt restructurings.

A Test for the Common Framework

Ethiopia began restructuring its external debt under the G20 Common Framework in 2021 and remains the only country still undergoing the process.

The government reached a separate agreement with bilateral creditors last year to restructure its official external debt. The private creditor agreement is an important remaining step toward resolving Ethiopia’s default.

The restructuring is also being closely watched as a test of the G20 Common Framework, which was established during the COVID-19 pandemic to make sovereign debt restructurings more coordinated and predictable.

Previous restructurings involving countries such as Ghana and Zambia have highlighted difficulties in coordinating governments, China, Western creditors and private investors.

Bondholders still need to formally approve the proposed agreement before it can take effect.

For Ethiopia, completion of the restructuring would mark a significant step toward resolving its default and potentially restoring access to international capital markets.

Source: Reuters