Congo trade finance creditors organise against unresponsive government, IMF awaits Chinese financial assurances

Author(s): by Laura Gardner Cuesta
The Republic of Congo's trade finance creditors have formed a consortium to negotiate the reprofiling of sovereign and sovereign-guaranteed debt, but discussions have stalled due to a lack of government engagement, said a source close to and a source familiar with the situation.

The consortium includes commodity traders Glencore and Trafigura as well as several banks which lent to the companies under trade finance facilities, said the first and a second source close and the source familiar.

A third local trader, Orion Oil, is also part of the consortium, according to the second source close and the source familiar. Orion Oil’s CEO Lucien Ebata was reported to be part of a team of senior Congolese officials tasked with handling negotiations with the International Monetary Fund (see below).

The lender group submitted a proposal earlier this year to reprofile debt owed by the government and the national oil company, Societe National des Petroles du Congo (SNPC), according to the first source close and the source familiar. The government’s failure to respond has led the creditor group to engage in legal correspondence with the government, the same two sources added.

The government is in arrears on oil deliveries due under oil pre-sales agreements, on which the traders have claims on oil but no guarantee of being paid on time, the second source close said. As such, members of the consortium are individually increasing their legal defenses, with at least one of them having hired legal advisors, according to the source familiar. But the second source close said there had not been any moves to initiate litigation yet.

A Trafigura spokesperson told Debtwire that the company had “made a few proposals to re-profile SNPC’s debt, which are currently being discussed”. The debt in question takes the form of commercial prepayments to SNPC against crude oil deliveries. The Trafigura spokesperson declined to comment on the formation of a consortium or on any legal moves the company may have taken against the Congolese government.

Glencore declined to comment on the restructuring talks with Congo. Orion Oil representatives could not be reached for comment. The Republic of Congo did not reply to a request for comment.

As reported, the commercial creditor negotiations are part of a USD 9bn restructuring of sovereign and SNPC sovereign-guaranteed debt, which commercial and official creditors notionally committed to undergo in July. XAF 1.2tn (USD 2bn) is estimated to be owed to Glencore and Trafigura, according to a report published by the French embassy in Congo in February this year.

As previously reported, Congo’s USD 477,790,000 (original size) 2029 bond will not be included in the restructuring, as it represents only 4% of the country’s total external debt. That paper was originally restructured in 2007, when law firm Cleary Gottlieb advised on the exchange of USD 2.3bn London Club bank claims for the fixed-rate note. The notes are bid at 77.95 according to IHS Markit.

Chinese walls 

The restructuring process also involves the renegotiation of Congolese and SNPC debt with Chinese government-related creditors, which the same embassy report estimates is XAF 1.6tn (USD 2.78bn).

But talks with China are equally on hold, although in this case it is due to the Chinese side’s failure to show sufficiently strong financial commitments to the debt restructuring, the second source close and the source familiar said.

Although officials in Beijing sent two letters (in July and September) affirming their commitment to restructure and reprofile the debt owed by the Republic of Congo and its national oil company, the assurances were not deemed sufficient by the Congolese government nor, crucially, by the IMF, the second source close said.

The Republic of Congo has requested a three-year Extended Credit Facility arrangement with the IMF which could see the fund disburse up to USD 500m over the programme’s lifetime, as reported. But the Fund has delayed putting this request to its Board since the summer, primarily due to lack of progress on the restructuring talks, as reported.

The IMF concluded a Staff Mission to Brazzaville last week, after which it informed Congo that for the Board to consider its ECF request, it would have to secure “explicit assurances on financing from external official creditors, including debt relief”. This refers primarily to Chinese debt, the second source close said, and the source familiar added that it also likely referred to a relatively small amount of Paris club debt.

“[The issue with China] is that this is the first time that Beijing is going to agree to such a large debt restructuring,” said the second source close. “[While China may have committed to ensuring Congo’s debt sustainability], neither the IMF nor Beijing know what the definition of "debt sustainability" being used by either side is. This is an issue that wouldn’t arise with the Paris Club for instance, because the IMF could be certain that this group of creditors is using the same definitions and assumptions.”

“China’s behaviour so far in these situations has been very much to kick the can down the road, without really putting the borrower on a path to sustainable debt servicing,” the second source close continued. “They already agreed to a small debt rescheduling earlier in the year, but it's basically nothing. So the ball is in China’s court on this one, and I expect the final decision will come from the highest level.”

What was less clear from the end of mission statement was whether the Fund’s board would still consider Congo’s ECF request if the government failed to reach an agreement with commercial creditors. An IMF spokesperson did not reply to a request for comment on this matter.

The IMF has also required Congo to make some adjustments to its 2019 Draft Budget, which is awaiting parliamentary approval, and implement a set of reforms to improve governance and transparency in the country before it puts its ECF request to the board.

Lacklustre growth

Meanwhile, Congo’s modest growth prospects are likely to make it harder for the country to reduce its debt burden, making the IMF programme approval all the more pressing, according to an EM economist.

Indeed, in its end of mission statement, the IMF predicted that Congo’s GDP growth was unlikely to exceed 1% in 2018, one percentage point lower than earlier projections. This is because despite an expected strong growth in Congo’s dominant oil sector, its non-oil sector GDP is projected to contract by 6% this year. The IMF predicts Congo’s overall GDP growth could reach 3% in 2019, although it is unclear if these figures take into account the strong declines in crude prices seen last week.

But despite all the headwinds, the second source close and the source familiar agreed that the IMF appeared willing to support Congo with an ECF. Indeed, the Fund’s end of mission statement commended the government’s progress in implementing structural reforms and transparency measures.

“The IMF is very keen to get Congo on a programme, as it is the only country in the CEMAC [Central African Economic and Monetary Community] that isn’t on one,” said the source familiar. “I think the programme talks can go ahead without an agreement with Glencore or Trafigura, but China is the missing piece.”

The Republic of Congo has hired Lazard and Cleary Gottlieb as financial and legal advisors respectively, as reported.

The Republic of Congo is rated B- by S&P Global Ratings, Caa2 by Moody’s and CC by Fitch.
 
By Laura Gardner Cuesta