Brazzaville defaults on bond payment

09 August 2016, Week 31, Issue 651

The rating for the Republic of Congo (Brazzaville) has been lowered to selective default (SD/D) by Standard & Poor’s after missing a payment, it was announced on August 2. This follows similar moves from Moody’s, on August 1, and Fitch. 

The bond in question was a US$478 million note due in 2029, issued under a restructuring of a London Club debt in 2007, the ratings agency said. Brazzaville had exercised a 30-day grace period but this expired on July 30. This is the country’s only current bond. 

As a result, S&P said it had lowered the rating on long- and short-term foreign currency sovereign credit rating for Congo (Brazzaville). 

“If and when the Republic of Congo cures the payment default on the notes, we will revise our ratings on the sovereign depending on our assessment of residual litigation risk, access to international debt markets, and the sovereign's overall credit profile,” S&P said. 

It will remain at SD/D until the default has been resolved. At that point, the rating would likely be raised to CCC or low B, S&P continued. As such, this would be considered a junk bond. 

The local currency rating was affirmed at B-/B, S&P continued, based on a belief that “potential disruptions to interest and principal payments on the Congo's external debt are not likely to further erode its ability to service its debt issued in its local currency”, it said. 

The SD/D rating does not carry an outlook, it continued, but the statement did report that Congo (Brazzaville) faced balanced risks. These apply specifically to local currency debt, “with a less than one-in-three likelihood that we would raise or lower the local currency rating within the next 12 months”.

Moody’s issued its downgrade a day earlier, saying the country was on review for further cuts. The agency cut Congo (Brazzaville) to B3 from B2. 

Moody’s said the payment was relatively small and that a second payment, of a similar size, was due in December 2016. Interest on the bond is “well below market rates” and the maturity, at 2029, is “particularly long”. Brazzaville is reported to have blamed the missed payment on an administrative error, saying that it would resolve this shortly. 

“The missed payment came as the [Brazzaville] government has come under financial pressure from low oil prices. In 2015, the government derived an estimated 43% of its revenue from the oil sector. As such, the drop in oil prices has resulted in a marked deterioration in the government's fiscal position and its balance sheet,” said Moody’s.