Investor losses after the restructuring of Zambia’s three defaulted Eurobonds are likely to be greater than expected, Morgan Stanley said on Tuesday, adding that a new combined ‘super bond’ maturing in 2029 was a possibility.

A “realistic scenario” would be for the $3 billion of bonds to undergo a 35% principal haircut, a 30% cut to interest payments and 50% of accrued payments being written off.

That would mean a recovery value of $56.50, an exit yield of 12% and a cut in the debt’s net present value – the value of future payments – of 51%, bank analysts said in a note.

Zambia became the first African sovereign default in the pandemic era in 2020, with debt that the International Monetary Fund (IMF) said reached 133% of GDP at the end of last year.

The IMF said last week that Zambia will need $8.4 billion of debt relief from 2022 until 2025, in a report known as a Debt Sustainability Analysis (DSA) that forms the basis of negotiations to restructure the country’s more than $17 billion in external debt.

“The two key unknown questions that will form part of restructuring talks are: 1) Whether an upfront principal haircut is required,” the Morgan Stanley note said.

“And 2) How many payments can be made immediately after the programme ends… from 2026 onwards.”

The IMF’s figures suggest external debt “relief” needs to be 35-45%, Morgan Stanley said.

World Bank president David Malpass said in a statement last week, “a deep debt reduction of 45% in net present value (NPV) terms… is essential”.

Bondholders have previously expressed dissatisfaction with being left out of early restructuring negotiations, including over assumptions in the DSA.

A ‘super bond’, where old bonds are combined into one new one, is also possible, Morgan Stanley said, setting out a $52 recovery value from a hypothetical seven-year maturity, with a 20% principal haircut, a 50% reduction in missed payments and a 5% coupon from 2026.

Currently, Zambia’s 2022, 2024 and 2027 bonds are trading at 56.04, 58 and 57.5 cents in the dollar respectively, according to MarketAxess data.