JPMorgan alerts smaller African development banks that their Preferred Credit Status may be jeopardized

JPMorgan analysts have cautioned that Preferred Credit Status may be revoked for a few of Africa’s smaller multilateral development institutions, such as the Trade and Development Bank (TDB) and the Africa Export-Import Bank (Afrexim).

According to a generally acknowledged concept known as Preferred Creditor Status (PCS), MDBs are prioritized for debt repayment in the event that a nation or business they have provided loans to faces financial difficulties.

It is fundamental to the banks’ ability to provide developing nations cheaper borrowing. Larger MDBs have, however, expressed concern that certain smaller regional ones, particularly in Africa, might not offer enough loans at concessional rates to make the privilege worthwhile.

Uncertainty over what will happen to the loans that Afrexim, TDB, and other parties have given to Zambia, Ghana, and Malawi has caused stress in their debt restructuring processes.

In a research note published on Monday, JPMorgan’s analysts stated that it “looks more likely to us now that PCS gets tested negatively in a few sovereign restructurings for smaller MDBs.”

“This might lead to their claims being viewed as a component of the total restructured debt,” the statement continued, noting that this would increase the risk associated with their bonds.

They calculated that the debt restructurings of both Malawi and Zambia were likely to include TDB’s exposure to their governments.

Afrexim’s exposure to the governments of Ghana and Malawi is also in jeopardy, however this is less likely given that the government of Ghana is allegedly contacting the IMF to protect the bank, even though Ghana’s major public sector creditors apparently want Afrexim to accept losses. JPMorgan’s analysts stated, “We position underweight Afrexim and TDB, taking this risk, banks’ loan concentrations, and bond valuations into consideration.” Underweight is essentially an advice to sell or avoid a bond.

Central banks, commercial banks, and central governments are the main recipients of direct loans from Afrexim. In addition to the central banks of Egypt and Nigeria, which each own 15% of the company, it also has some private investors.

TDB is primarily concerned with project finance and trade in Eastern and Southern Africa. The stake held by the African Development Bank is nine percent. Like Afrexim, it is partially owned by private companies and has 5-7% share each from Egypt, Ethiopia, Kenya, and Tanzania.