• J.P. Morgan voices confidence in Afreximbank's bonds, despite the bank's exposure to sovereign debt and potential for further rating downgrades
• Afreximbank's dubious credits have hit 7.1% at end of 2024, amid concerns over debt restructuring in countries such as Ghana and Zambia
• Bonds trade at a premium, offering attractive returns despite rising risks

Despite a rating downgrade by Fitch and increased exposure to sovereign debt, Afreximbank continues to attract J.P. Morgan, which now views its bonds as promising even amid uncertainty.

As the fallout from payment defaults continues to rattle the bond market in several African nations, Afreximbank finds itself at the centre of a crucial debate: Is being a multilateral creditor still enough to protect against the rising threat of sovereign risk? For J.P. Morgan, the question seems to hold less importance than the potential returns now offered by the bank’s bonds.

In a report published on Tuesday, June 17, the American bank expressed that Afreximbank's likelihood of getting directly involved with ongoing debt restructuring processes—notably in Ghana and Zambia—has increased. This could potentially lead to a further rating downgrade for the Pan-African institution, currently one notch above speculative status, following Fitch's decision at the start of June.

The rating agency pointed out increasing exposure to high-risk borrowers, perceived weak credit management policies, and a dubious credit rate hitting 7.1% by the end of 2024. These elements undermine the privileged creditor status that Afreximbank claims, similar to major multilateral institutions.

Despite this deteriorated risk profile, J.P. Morgan is now recommending the purchase of bonds issued by the bank. This is due to significant valuation adjustments. The 2029 and 2031 bonds are currently trading at 75 basis points above the observed average for BB to BBB-rated bonds. This differential, according to analyst Konstantin Rozantsev, more than compensates for the risk of being downgraded to "high yield" and potentially participating in restructuring.

According to J.P. Morgan, if the bank is involved in a restructuring operation, Fitch may withdraw its 'investment grade' rating, triggering technical sales. However, at these levels, the potential return remains attractive, it said.

As the debate over sharing the burden in sovereign debt restructuring continues to divide public and private creditors, Afreximbank’s stance could set a precedent for other African development banks.