Afreximbank risks debt restructuring and junk rating, JPMorgan warns

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 have 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 nonperforming 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 $750m and under $100m, 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.

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 subinvestment grade.

Those on the call pressed Perry on whether Fitch’s downgrade was warranted. Both sources described the questions as unusually heated.

Weak transparency

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.

Rozantsev’s calculations showed Afreximbank’s loans at risk — those extended to Ghana, Zambia, Malawi and South Sudan — stood at about $2bn, or 7% of its loan book — in line with Fitch’s NPL estimate.

“We also think that the bank should maintain access to funding, though likely at higher costs,” Rozantsev added.

Both the 2029 and 2031 bonds have slipped about 3c since the Fitch downgrade, trading at 89.4c and 83.2c, 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.

Reuters