Explainer: Why is Afreximbank in Focus Over Africa Debt Restructuring Deals?

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.

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.

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.

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.

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.

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.