Afrexim increasingly likely to take hit on loans, says JPMorgan
LONDON - The chances of Afreximbank getting involved in a debt restructuring have increased, JPMorgan said on Tuesday, a development that could prompt ratings agency Fitch to lower the lender's rating to junk and force some investors to sell its bonds. The African lender has been at the centre of a standoff over whether the loans it extended to Ghana and Zambia - two countries that recently defaulted - are in scope for restructuring or not. Fitch downgraded Afreximbank's credit rating to one notch above junk on June 4, with a negative outlook, sending the lender's bonds lower. The ratings agency cited high credit risks and weak risk-management policies and pegged Afreximbank's non-performing loans at 7.1% at the end of 2024.
Afreximbank says that as a multilateral lender, it has preferred creditor status, which protects its loans from restructurings in Ghana, Zambia, and Malawi.
"If the bank gets involved in a restructuring (the chances of which have increased...), Fitch could downgrade the bank further from IG (investment grade) to HY (high yield) at some point, which could lead to some forced selling of bonds," JPMorgan analyst Konstantin Rozantsev said in a research note. JPMorgan pointed to recent comments from the governments of Ghana and Zambia, which each said they intend to restructure Afreximbank debts. The countries owe Afreximbank $750 million and under $100 million, respectively, JPMorgan said.
Preferred creditor status is a widely accepted principle under which multilateral development banks are given priority if a borrower faces distress, sheltering lenders from painful writedowns. The status is accepted by convention rather than awarded by an entity.
HEATED CALL
The Wall Street bank's recommendations came a day after an investor call it hosted featuring Nick Perry, director of supranationals at Fitch, and Babajide Sodipo, a senior Afreximbank official who is also acting secretary at the Alliance of African Multilateral Financial Institutions - an umbrella body for the continent's multilateral lenders.
According to two sources, Perry told investors on the call that if Afreximbank restructured a loan to any member country - thus throwing its preferred creditor status into doubt - it faced another downgrade to sub-investment grade.
Those on the call pressed Perry on whether Fitch's downgrade was warranted. Both sources described the questions as unusually heated.
Perry told questioners that Fitch's rating included an assumption that the lender maintained preferred creditor status, but cited weak transparency from the bank as a key contributor to the downgrade.
Fitch declined to comment. JPMorgan, Afreximbank, and Sodipo did not respond to requests for comment.
In Tuesday's research note, Rozantsev - who moderated the call - said JPMorgan expected the impact on Afreximbank of any potential losses from stressed sovereign exposures, or from further rating downgrades, to be limited.
"Afrexim operates with decent profitability, which should help it to absorb possible losses related to five of its sovereign exposures exhibiting stress," Rozantsev wrote.
7% OF LOAN BOOK
Rozantsev's calculations showed Afreximbank's loans at risk - those extended to Ghana, Zambia, Malawi, and South Sudan - stood at around $2 billion, or 7% of its loan book - in line with Fitch's NPL estimate.
"We also think that the bank should maintain access to funding, although likely at higher costs," Rozantsev added.
Both the 2029 and 2031 bonds have slipped around 3 cents since the Fitch downgrade, trading at 89.4 cents and 83.2 cents, respectively, Tradeweb data showed.
The price drop made them "attractive," with both maturities trading 75 basis points wide of the average across other BB-BBB rated bonds, Rozantsev wrote, prompting JPMorgan to change its recommendation on the bonds to overweight from underweight.
"Valuations compensate for the risk of further adverse rating actions on the bank, which are possible," Rozantsev said.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Zawya
3 hours ago
- Zawya
Hotel groups Hilton and Marriot announce African expansion plans
U.S. hotel chains Hilton and Marriott have announced African expansion drives to tap into the continent's rapid tourism growth. Rising business and leisure travel on the continent has made it increasingly attractive for multinational companies and Hilton said on Wednesday that it plans to more than triple its African portfolio to more than 160 hotels. The company plans to enter Angola, Ghana and Benin for the first time while returning to Madagascar and Tanzania, its statement said without providing a specific time horizon for the expansion plans. Marriott expects to add 50 properties by 2027, it said on Wednesday. Those will include entry into five new countries: Cape Verde, Ivory Coast, the Democratic Republic of Congo, Madagascar and Mauritania. The group's existing African portfolio encompasses nearly 150 properties and 26,000 rooms across 20 countries and 22 brands. Airlines have also increased their African capacity. Emirates now offers 161 weekly flights across Africa, recently adding daily services to Entebbe and Addis Ababa. United Airlines launched a direct Washington-Dakar route in May and Delta will begin a seasonal daily flight to Accra in December. International arrivals to the continent rose 9% year on year in the first quarter of 2025, the United Nations World Tourism Organization says, 16% above the same period of pre-pandemic 2019. That momentum is translating into economic impact. Tourism accounts for between 3% and 7% of gross domestic product in countries such as Kenya, Morocco and South Africa, and up to 15% in tourism-heavy economies such as Namibia, World Bank and national statistics show. (Reporting by Colleen Goko Editing by David Goodman)
Zawya
4 hours ago
- Zawya
Why is Afreximbank in focus over Africa debt restructuring deals?
NAIROBI - The African Export-Import Bank has been thrust into the spotlight due to a dispute over whether its loans to African countries now in default should be subject to writedowns in debt restructuring deals. Here are more details about the Cairo-based lender: WHAT IS AFREXIMBANK'S ROLE? Afreximbank was set up by African governments in 1993 to provide trade finance when their economies were reeling from a debt crisis resulting from a crash in commodities prices. Its balance sheet has since grown to $35 billion. Though mandated to promote trade, it has also helped economies weather shocks like West Africa's 2014 Ebola outbreak and the COVID-19 pandemic through a $3 billion stabilisation facility. Crisis lending has turned Afreximbank into an important source of hard currency for cash-strapped governments. It launched a central bank deposit programme in 2014 modelled on a Banco Latinoamericano de Comercio Exterior initiative to raise capital from regional central banks to fund development. From just $75 million in initial deposits, this has now mobilised $37 billion cumulatively, or 40% of Afreximbank's sources of financing. WHO OWNS AFREXIMBANK? Afreximbank has four shareholder categories. Class A is made up of African governments, which hold more than 50% of shares spread among 53 member states. The African Development Bank, Africa's biggest development lender, and other sub-regional financial institutions are also category A shareholders. African financial institutions and private funds hold Class B shares - about a quarter of the total. Class C shares are reserved for overseas investors. Afreximbank created Class D shares for general investors in 2017, listing them on the Mauritius Stock Exchange, and is considering a secondary listing. WHAT IS AFREXIMBANK'S STATUS? The current debate focuses on whether Afreximbank enjoys Preferred Creditor Status - a widely accepted principle giving multilateral development banks priority if a borrower faces distress. Though accepted by convention rather than awarded by an entity, the status would insulate Afreximbank's lending from painful haircuts during the kinds of sovereign restructurings recently carried out by Ghana and Zambia. Afreximbank says its founding treaty confers it with Preferred Creditor Status, precluding it from engaging in debt restructuring talks with its member states. Critics, however, point out that some of Afreximbank's lending is done on commercial terms - or market rates - rather than the concessional terms the International Monetary Fund or World Bank employ to extend loans and grants. Its ownership structure also includes commercial investors. WHAT DISPUTES IS AFREXIMBANK FACING? Afreximbank is in a dispute in English courts with South Sudan over a claim of around $650 million across three facilities from 2019 and 2020. Ghana, struggling to conclude its debt overhaul, said it has invited the lender for talks on how to restructure its Afreximbank debt. Zambia has stated that its Afreximbank loan, estimated by think tank ODI Global to be $45 million, will be restructured due to its commercial nature. Malawian officials quoted in domestic media outlets say they want to engage Afreximbank to restructure and lighten the country's debt service burden. Afreximbank has repeatedly said it is not in restructuring talks with any of its member states. WHAT ARE THE IMPLICATIONS OF THE STATUS DEBATE? Afreximbank's two main dollar bonds suffered their worst daily drop in over a year this month after Fitch downgraded it to BBB-, from BBB, citing emerging credit risks. Afreximbank blamed the downgrade on an "erroneous" interpretation of its founding treaty. Given the negative outlook from Fitch, Afreximbank is at risk of further downgrades, which could raise its borrowing costs and trigger some forced selling of its bonds. Some investors think the outcome of the standoff could have a bearing on the successful conclusion of current and future debt restructurings. For Afreximbank, this is a sensitive time. It is expected to pick a new president during its annual meeting later this month, replacing Nigerian economist Benedict Oramah, who is set to step down after a decade in charge.
Zawya
4 hours ago
- Zawya
Afrexim increasingly likely to take hit on loans, says JPMorgan
LONDON - The chances of Afreximbank getting involved in a debt restructuring have increased, JPMorgan said on Tuesday, a development that could prompt ratings agency Fitch to lower the lender's rating to junk and force some investors to sell its bonds. The African lender has been at the centre of a standoff over whether the loans it extended to Ghana and Zambia - two countries that recently defaulted - are in scope for restructuring or not. Fitch downgraded Afreximbank's credit rating to one notch above junk on June 4, with a negative outlook, sending the lender's bonds lower. The ratings agency cited high credit risks and weak risk-management policies and pegged Afreximbank's non-performing loans at 7.1% at the end of 2024. Afreximbank says that as a multilateral lender, it has preferred creditor status, which protects its loans from restructurings in Ghana, Zambia, and Malawi. "If the bank gets involved in a restructuring (the chances of which have increased...), Fitch could downgrade the bank further from IG (investment grade) to HY (high yield) at some point, which could lead to some forced selling of bonds," JPMorgan analyst Konstantin Rozantsev said in a research note. JPMorgan pointed to recent comments from the governments of Ghana and Zambia, which each said they intend to restructure Afreximbank debts. The countries owe Afreximbank $750 million and under $100 million, respectively, JPMorgan said. Preferred creditor status is a widely accepted principle under which multilateral development banks are given priority if a borrower faces distress, sheltering lenders from painful writedowns. The status is accepted by convention rather than awarded by an entity. HEATED CALL The Wall Street bank's recommendations came a day after an investor call it hosted featuring Nick Perry, director of supranationals at Fitch, and Babajide Sodipo, a senior Afreximbank official who is also acting secretary at the Alliance of African Multilateral Financial Institutions - an umbrella body for the continent's multilateral lenders. According to two sources, Perry told investors on the call that if Afreximbank restructured a loan to any member country - thus throwing its preferred creditor status into doubt - it faced another downgrade to sub-investment grade. Those on the call pressed Perry on whether Fitch's downgrade was warranted. Both sources described the questions as unusually heated. Perry told questioners that Fitch's rating included an assumption that the lender maintained preferred creditor status, but cited weak transparency from the bank as a key contributor to the downgrade. Fitch declined to comment. JPMorgan, Afreximbank, and Sodipo did not respond to requests for comment. In Tuesday's research note, Rozantsev - who moderated the call - said JPMorgan expected the impact on Afreximbank of any potential losses from stressed sovereign exposures, or from further rating downgrades, to be limited. "Afrexim operates with decent profitability, which should help it to absorb possible losses related to five of its sovereign exposures exhibiting stress," Rozantsev wrote. 7% OF LOAN BOOK Rozantsev's calculations showed Afreximbank's loans at risk - those extended to Ghana, Zambia, Malawi, and South Sudan - stood at around $2 billion, or 7% of its loan book - in line with Fitch's NPL estimate. "We also think that the bank should maintain access to funding, although likely at higher costs," Rozantsev added. Both the 2029 and 2031 bonds have slipped around 3 cents since the Fitch downgrade, trading at 89.4 cents and 83.2 cents, respectively, Tradeweb data showed. The price drop made them "attractive," with both maturities trading 75 basis points wide of the average across other BB-BBB rated bonds, Rozantsev wrote, prompting JPMorgan to change its recommendation on the bonds to overweight from underweight. "Valuations compensate for the risk of further adverse rating actions on the bank, which are possible," Rozantsev said.
