Fitch Downgrades Republic of Congo after Debt Exchange Deal
Fitch Ratings has downgraded the Republic of Congo’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘Restricted Default’ (RD) from ‘CCC+’ following the execution of an exchange of local-currency bonds.
In a rating note, Fitch expressed belief that the exchange constituted a default event as outlined in its Sovereign Rating Criteria published 24 October 2024.
Fitch has subsequently taken additional actions, reflecting the completion of the debt exchange. The rating agency published a rating review following a material change in the creditworthiness of the issuer, which analysts believe makes it inappropriate to wait until the next scheduled review date to update.
On 14 October, the government of Congo announced an exchange offer on all its outstanding CFA franc debt issued in the regional market.
This amounted to XAF2.3 trillion, 45% of the total domestic debt stock, including arrears. The rating agency said the offer aimed to exchange the debt for new CFA franc bonds with longer maturities and similar coupons and principals.
The offer also included an upfront fee payment to creditors (1%-3% of principal) and the regional central bank, Bank of Central African States (BEAC), granted the new issuances 0% risk-weighting.
Fitch deems that this exchange constitutes a distressed debt exchange (DDE) given that it represents a material reduction in terms via the extension of maturities, and in Fitch’s opinion, was designed to avoid a traditional payment default.
Analysts understand that the exchange operation is now complete, with 53% of the outstanding bonds exchanged for new securities, with unchanged coupons and principals, but with a significant extension in maturities.
Close to 85% of the outstanding bonds exchanged were OTAs—maturities over one year—with the remainder BTAs -maturities below one year. The average time-to-maturity of the new OTAs is of 7.4 years, compared with three years for the old OTAs.
In Fitch’s view, the exchange operation was designed to avoid a traditional payment default, given Congo’s significant domestic financing needs against a backdrop of tight liquidity and limited financing options.
Congo faced significant local-currency securities amortisations of XAF1.45 trillion by end-2026, or 63% of the total outstanding amount.
Appetite for Congo’s issuances has been declining in recent quarters, particularly for longer maturities (over three years), with subscription rates at auctions falling to historical lows in 2024.
These pressures contributed to instances of late servicing of domestic bonds in May and August 2024, all of which were due to technical and administrative issues according to the Congolese authorities, and all of which were resolved within Fitch’s imputed grace period of 30 days.
The OTA exchange represents a reduction in gross financing needs of 0.1% of GDP in 2024, 2.7% in 2025 and 2.4% in 2026. The BTA exchange represents an additional reduction in gross financing needs of 1.5% of GDP in 2024.Congo also issued new BTAs (new cash) worth XAF250 billion as part of the operation.
The upgrade of Congo’s creditworthiness to ‘CCC’ following the completion of the exchange reflects Fitch’s view that another default event remains a real possibility in light of stressed repayment capacity and weak public finance management.
The affirmation of the Long-Term Foreign-Currency IDR at ‘CCC+’, higher than the Long-Term Local-Currency IDR, reflects the recent prioritisation of foreign-currency debt service.
The ratings reflect Congo’s recent history of defaults, high government debt, weak governance indicators, low GDP per capita, high oil dependence and weak management of public finances.
This is balanced by reduced liquidity pressures from the extension of local-debt maturities and a decline in external amortisations over 2025-2026 (following significant repayments in recent years). It also reflects our expectation of fiscal and external surpluses underpinned by a still supportive oil price environment and the IMF’s Extended Credit Facility.
Fitch estimates Congo’s external amortisations will decline to 3.5% of GDP in 2024 and 2.3% in 2025, down from 6.4% in 2023. This will largely reflect the lower debt servicing to oil traders, which Fitch estimates will be mostly repaid by end-2024.
“We expect Congo’s programme with the IMF to support the country’s repayment capacity, underpinned by access to disbursements from the official sector and bilateral partners”.
Fitch forecasts Congo’s government debt/GDP to decline to 90.4% at end-2024 and 86.1% in 2025, from 99.0% in 2023, driven by wide primary budget surpluses.
It said debt/GDP forecasts are subject to uncertainties as the ongoing auditing of domestic arrears could lead to upward revisions of the stock. Conversely, authorities are implementing a restructuring programme for domestic commercial arrears that could translate into a reduction of the stock.
“We understand that the stock of commercial domestic arrears does not include financial debt, so this would not be considered an IDR default under our criteria.”. Congo’s international reserves fell to USD845 million in 2023 from USD939 million in 2022 due to significant private and public debt repayments.
“We forecast Congo’s imputed international reserves to increase only marginally to USD905 million in 2024 and USD1.1 billion in 2025, owing to lower debt repayments and stronger FDI inflows.
“This will translate into coverage of current external payments averaging 1.6 months. The pooled reserves of BEAC stood at USD11.4 billion at end-2023”. #Fitch Downgrades Republic of Congo after Debt Exchange Deal Liquidity: Banks Drive Yield Surge with T-Bills Selloffs
