Ethiopia’s sole eurobond rallied sharply after the government reached an agreement in principle with bondholders on a debt restructuring that limits investor losses to a relatively modest 15% haircut, boosting confidence in the country’s path toward debt sustainability.

The defaulted bond gained 2.61 cents on the dollar, trading at 110.09 as of 4:26 p.m. London time. The rally reflects optimism around the proposed terms, which include a high coupon on the replacement bond and front-loaded principal repayments that improve near-term cash recovery for investors.

Details of the proposed Bond Exchange

Under the agreement, Ethiopia plans to issue a new $850 million bond, factoring in the 15% reduction from the original $1 billion 2024 eurobond that the country defaulted on two years ago.

According to a statement dated January 2 from White & Case LLP, which represents Ethiopia, the new bond will mature in 2029 and carry a 6.125% coupon. The repayment structure is heavily weighted toward early principal returns, with $350 million due by July 15 this year and another similar payment scheduled two years later.

Market participants noted that the combination of a relatively high coupon and accelerated repayments helped support the bond’s sharp price increase.

IMF approval remains a key hurdle

While the agreement is seen as a positive step, its final implementation depends on approval from the International Monetary Fund and Ethiopia’s Official Creditor Committee (OCC).

Smail Ait-Mahrez, a Dubai-based capital markets professional, said the deal sends an encouraging signal, particularly if it is viewed as transparent and aligned with IMF program parameters. However, he cautioned that investors are unlikely to extrapolate the agreement too aggressively until formal approvals are secured.

An IMF spokesperson said the deal represents progress toward restoring Ethiopia’s debt sustainability and confirmed that the Fund will assess whether the terms align with the objectives of its existing program.

Ethiopia agreed to a $3.4 billion IMF financing program in 2024 and reached a staff-level agreement on the fourth review of that program in December.

Bondholder support and common framework dynamics

The Ethiopia Ad Hoc Committee, representing financial institutions in the US and Europe, said it believes the proposed financial terms are compatible with Ethiopia’s IMF program and meet the OCC’s comparability of treatment requirements.

The restructuring is being conducted under the G20 Common Framework, which has faced criticism in the past for deals that favored investors during periods of economic strength without adequately protecting against downturns.

Value Recovery and Downside Protection

A notable feature of the deal is the inclusion of both upside and downside mechanisms. Investors could recover up to $180 million through a value recovery instrument (VRI) that runs until 2037 if Ethiopia’s exports outperform expectations.

Ethiopia’s main export earners are coffee and gold, with gold revenues receiving a significant boost from a roughly 60% rise in global gold prices over the past year. Central bank data show the country earned $3.45 billion from gold exportsand $2.65 billion from coffee shipments in the fiscal year ending July 7.

However, the agreement also introduces a downside adjustment, marking what could be the first Common Framework restructuring where investors receive less if the economy underperforms. Under the proposed terms, investors could forgo up to $100 million in the final July 2029 payment if goods exports fall below 85% of IMF forecasts for the two preceding fiscal years.

This downside protection may prove crucial in securing OCC approval. The committee, co-chaired by China and France, previously rejected a proposal in October that offered investors only upside exposure without penalties for weaker economic performance.

A step toward market re-entry

For Ethiopia, the agreement represents a meaningful step toward stabilizing its debt position and restoring credibility with international investors after years of financial strain.

While risks remain and IMF approval is still pending, the bond rally suggests markets are cautiously optimistic that Ethiopia is moving closer to resolving its default and rebuilding access to global capital markets.