In a note, strategist Nikola Apostolov said the bank expects bondholders to get back somewhere between 43 and 50 cents for every dollar of face value, assuming the country restructures its debt. The exact number depends on the exit yield - the interest rate investors would demand on new bonds after a deal.
At a 9% exit yield, recovery would be about 50 cents. At an 11% exit yield, it drops to 43 cents.
"Our external debt renegotiation scenario assumes a large nominal haircut will be required," Apostolov wrote.
Apostolov further noted that renegotiating external debt would be essential if Senegal intends to continue with the IMF program.
Bloomberg data showed Senegal's dollar bonds changed hands at prices between 51 and 54 cents per dollar on Thursday. The 2048 maturity bond was priced at 51.70 cents at 2 p.m. London time.
In contrast to Zambia and Ghana, which recently finished debt overhauls, Senegal is not experiencing balance-of-payments strains, Citigroup noted. Rather, its primary difficulty lies in fiscal and debt sustainability.
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Senegal's debt levels are at 130% of gross domestic product and an International Monetary Fund program has been suspended. Even though the government is largely against restructuring, these issues might compel action.
According to Bloomberg News, Lazard Inc. has been appointed as financial advisor to Senegal's government.
Presently, Senegal is the most distressed sovereign issuer in Africa, with a spread of about 1,500 basis points over U.S. Treasuries, per a JPMorgan Chase & Co. index.
Domestic politics could determine if debt negotiations start this year. Meanwhile, the government has utilized regional debt markets to raise funds, yet it is encountering declining demand for its longer-term bonds.
"Liquidity conditions are tightening in our view, and Senegal's large funding needs could see pressures on the regional market," Apostolov said.
Without an active program, the government loses access to concessional loans and the credibility that comes with IMF endorsement. This often forces countries to turn to more expensive market borrowing or regional debt, which is already showing signs of strain. The combination of a 130% debt-to-GDP ratio and a halted program makes Senegal particularly vulnerable to a restructuring, even if the government resists the idea.
The trading levels of Senegal's bonds, above Citigroup's recovery estimate, indicate that market participants anticipate a less severe outcome. Additionally, the appointment of Lazard as financial adviser often precedes formal restructuring negotiations, as seen in other crisis-hit countries. The combination of high debt, an IMF program halt, and tightening regional liquidity suggests that Senegal may face increasing pressure to restructure in the coming months.
Political factors within Senegal could determine whether formal negotiations begin this year, adding another layer of uncertainty for bondholders.
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