The African Export-Import Bank (Afreximbank) has ended its credit ratings relationship with Fitch, accusing the agency of failing to understand its mandate.
The Cairo-headquartered multilateral development bank (MDB) announced the decision today following a review of its relationship with the agency.
It said its “firm belief” is that Fitch’s credit rating exercise “no longer reflects a good understanding of the bank’s establishment agreement, its mission and its mandate”.
“Afreximbank’s business profile remains robust, underpinned by strong shareholder relationships and the legal protections embedded in its establishment agreement, signed and ratified by its member states,” it added.
The MDB criticised Fitch in June last year after the agency downgraded it to BBB-, the lowest investment grade rating and one notch above junk, after reassessing its credit risk as “high” and its risk management policies as “weak”.
Fitch cited concerns over non-performing sovereign loans in Ghana and Zambia, which totalled US$750mn and US$45mn respectively. The bank also has exposure to Malawi and South Sudan.
Afreximbank had argued it should benefit from preferred creditor status, in line with typical MDB treatment, which would limit the likelihood of losses.
However, government representatives and other creditors sought to include those loans in wider restructuring efforts. Officials countered that, because rates on those loans were higher than for traditional concessional finance, they should instead be treated as commercial facilities.
Fitch said restructuring the loans would heighten the risks associated with Afreximbank’s strategy, and that its non-performing loan ratio should be recorded at 7.1% rather than the 2.3% reported by the bank.
But Afreximbank said in response that Fitch’s decision was “hinged on the erroneous view” that its establishing treaty – which it said confirms its preferred credit status – can be “violated by the bank without consequences”.
It has since resolved the dispute with Ghana, announcing last month that a resolution had been reached. However, Bloomberg reported the bank had agreed to the restructuring terms set by other creditors and was taking losses on the loan.
A report produced by Fitch last month and seen by GTR addressed the dispute, noting regional MDBs “have faced increasing challenges due to disagreements” about their preferred creditor status.
It reiterated that including MDB loans in restructuring efforts would likely result in weaker credit ratings, though added it “expects the principle of not including multilateral debt in the scope of sovereign debt restructurings to continue for most MDBs”.
Moody’s also downgraded Afreximbank last year, revising its long-term issuer and senior unsecured ratings from BAA1 to BAA2 and changing its outlook from stable to negative.
Meanwhile, in the wider MDB sector, agencies are increasingly seeking to unlock greater concessional financing by updating their methodologies.
S&P Global announced in October it was revising its approach to multilateral lenders and other supranational institutions, including a recalibration of risk weighting that takes into account preferred creditor treatment.
It estimated the move could allow MDBs collectively to grow development loans held on their balance sheets by US$600-800bn.
Chris Humphrey, a senior research associate at think tank ODI Global and a specialist in development finance, described the decision as “superlative news” in an October paper.
“S&P’s revised methodology reflects all this hard work that conclusively shows that MDBs can prudently lend more for development without endangering their taxpayer-funded share capital,” he said.
“It doesn’t mean the MDBs can suddenly ramp up lending,” Humphrey added. “If they did, they might get downgraded by Moody’s or Fitch, whose methodologies are much more restrictive.”
However, Moody’s is also expected to revise its methodology “in the near future”, he said.
