Afreximbank, a pan-African trade finance institution, has accused rating agency Fitch of giving an “erroneous view” on its exposure to potential losses, as the lender faces pressure over whether it fully disclosed the riskiness of loans made to Ghana and other cash-strapped nations.
Fitch Ratings last week said that the Cairo-based multilateral lender was at risk of suffering losses on an estimated $2bn in loans to Ghana, Zambia, Malawi and South Sudan, if it was not treated as a preferred creditor. It added that the bank had “weak risk management policies”, used “flexibilities” allowed by accounting standards to mark loans as performing and faced “higher solvency risk”.
In response, Afreximbank this week put out a robust statement, saying that it “operates under very high standards of financial transparency”, had complied with international accounting standards and was not able to take part in debt restructurings.
Concerns over Afreximbank’s loans have grown following a May 15 call, on which it told bond investors that Ghana was “up to date” on payments.
However, the Ghanaian finance ministry responded later that month that it had not paid the bank for two years and that “no creditor has been treated preferentially”. According to a letter seen by the Financial Times, Ghana’s finance ministry wrote to the bank last month asking for talks on a restructuring of $750mn in loans so it could exit a long-running default.
The escalating dispute centres on a rift among creditors about whether Afreximbank is operating like other multilateral institutions to which it likens itself and that lend money at low rates for development, or whether it provided riskier finance to make high returns that should expose it to potential losses.
“For a decade, [Afreximbank president Benedict] Oramah has been willing to take risks most multilateral development banks wouldn’t even contemplate,” said Bright Simons, head of research at Imani, a think-tank in Ghana.
“In the process, he has turned an obscure institution into one with massive clout in African capitals because he lends when others recoil,” he added. “But it has also lost its veneer as a safe, staid, conservative MDB.”
Founded in 1993, Afreximbank — which is owned by a range of African governments as well as institutions outside Africa such as China’s Exim Bank — traditionally focused on shorter-term trade finance. It largely lent to private borrowers, especially in Nigeria and Egypt, its biggest shareholder countries.
But over the past decade it has made more direct loans to governments, many of whom are shareholders that have been locked out of global bond markets by high interest rates in recent years.
Its 2024 financial statements show that only 2.3 per cent of its loans were non-performing as at the end of last year. However, Fitch estimates that the real figure is more than 7 per cent, given the disputed Ghana loans alone account for 2.4 per cent of the bank’s assets.
In May, an English court case ruled that South Sudan had been in default for years on loans making up more than 2 per cent of Afreximbank’s assets. The bank won a judgment to claw back $650mn but the country — one of the world’s poorest — did not take part in proceedings.
Afreximbank did not respond to a request for comment. It has previously said it is working on a repayment plan with South Sudan.
Fitch said last week that the bank’s ownership structure had “led to pressure to increase lending operations, at the expense of prudent growth objectives”.
The agency last week cut its rating on the bank to one notch above junk and said it could remove its investment-grade rating if the lender was included in a restructuring.
However, Afreximbank and supporters in the African Union say that, like the IMF and World Bank, the lender ranks as a senior creditor and therefore should not have to take losses in a restructuring. This week it said it would not be taking part in any such debt deals, citing the treaty setting up the bank. TDB, a trade-focused lender in east and southern Africa, is also claiming this status in debt talks with Zambia.
However, “there is nothing that can be construed as conferring preferred creditor status” in Afreximbank’s treaty, said Simons.
The bank’s claimed status is also under scrutiny because of the relatively high interest rates it charges on loans, compared with other multilateral lenders, and the payouts it makes to private shareholders. Unlike with other multilateral lenders, governments engaging with it use private intermediaries, such as banks that take a fee.
The bank reported almost $1bn in profit last year and paid almost $320mn in dividends for 2023. It is projecting that assets will increase to $50bn this year.
Ghana, which defaulted in 2022 months after it borrowed from Afreximbank at over 6 per cent above a benchmark interest rate, is pushing especially hard for its restructuring to include Afreximbank.
The country agreed with official lenders to extend $5bn of debt and a restructuring of $13bn of bonds in the past year with promises that it would not give other creditors preferential deals.
“Treating Afreximbank as a preferred creditor would mean other creditors would have to take higher losses to compensate Afreximbank for a loan that they feel should not have been made in the first place,” said Chris Humphrey, development finance specialist at think-tank ODI.
Ghana must disclose to bondholders by the end of this month whether it has complied with its promise of equal treatment.
ODI’s Humphrey said Afreximbank’s resistance to a debt restructuring in Ghana contrasted with the approach taken by TDB, which was ensnared in Zambia’s 2020 debt default after it rolled over short-term trade loans that were usually protected.
“TDB don’t feel that they should have to restructure their Zambia loans, but they are engaging constructively with other creditors to try to put this whole episode behind them. Afreximbank is taking a much more confrontational approach,” he said.
A downgrade to junk would pose a problem for Afreximbank because many of its bonds are owned by investors such as insurers that generally only hold investment-grade paper.
About one-third of Afreximbank’s funding also comes from cash reserves by borrowers and deposits made by African central banks, which the bank can use to bolster lending. These would also be sensitive to a junking of its credit.
“It is a story of mission creep for Afreximbank,” one investor said. “If you want to do hyper-expensive sovereign bailouts in the craziest zip codes you can find, your cost of finance is going to reflect that.”
