The implications of Fitch's downgrade on African financial institutions

Afreximbank recently terminated its relationship with Fitch Ratings. Fitch responded by downgrading the pan-African lender to junk and withdrawing coverage entirely. A messy divorce, publicly conducted.

The predictable narrative writes itself: another example of Western institutions misunderstanding African realities, applying frameworks built for developed markets to contexts they cannot read. 

Meanwhile, the African Union is launching its own rating agency, the African Credit Rating Agency (AfCRA), precisely because of this perception. I’m sympathetic to the cause.

The referees' record

Consider the ratings agency dispensation sitting in haughty judgement here. Between 2000 and 2007, Moody's stamped triple-A ratings on nearly 45,000 mortgage-related securities. By 2010, 73 percent of those supposedly pristine assets had been downgraded to junk. Standard & Poor's paid USD 1.375 billion to settle fraud allegations. Moody's paid USD 864 million. 

A former Moody's managing director, asked whether investment banks threatened to take their business elsewhere if they did not get the ratings they wanted, told investigators: "Are you kidding? All the time."

Thus, behold the referees. These are the institutions whose methodologies we are meant to accept as neutral arbiters of creditworthiness. They helped blow up the global economy, paid their fines, and kept it moving like nothing happened. Evidently, when the client is big enough, Western enough, lucrative enough, the standards flex.

So when Fitch and Moody's downgrade Afreximbank for shifting from trade finance towards sovereign lending to distressed African states, or when they place Dangote Industries on negative watch while GCR affirms it at AA+, I understand the frustration. The game feels rigged because, in meaningful ways, it is.

In the spreadsheets

However, oversimplification is the enemy here. There’s more to the story.

Consider corporate commentator Munya Hoto's recent examination of Cassava Technologies, the pan-African infrastructure company controlled by maverick billionaire Strive Masiyiwa. Hoto excavated a sentence from Moody's November credit opinion that deserves attention: Cassava's interest coverage ratio falls below 1.0 times when Zimbabwe's earnings are excluded. That means Cassava cannot cover its interest payments from its own operations.

The entire structure appears to depend on cash from Econet Wireless Zimbabwe, a separately listed company that sits outside the creditor perimeter. Bondholders owed $751 million have no direct claim on the only asset generating real money.

Now, as Cassava approaches a maturity it cannot meet, Masiyiwa has announced Econet Zimbabwe will delist from public markets. The one transparent window into the cash flows creditors depend on is about to close.

Moody's did not invent that capital structure. Hoto did not fabricate the creditor perimeter problem. The delisting timing is what it is. These are not Western narratives imposed on African reality. They are the numbers.

Here is the bind. Western finance has awkward structural incentives to maintain pressure on African sovereigns and corporates. Distress creates opportunities for rescue capital on predatory terms. Default clears the runway for alternative Western corporate operators they would be more than happy to swoop in with, to do things "properly."

This is not conspiracy; it is just how the incentives run.

But African exceptionalism cannot become cover for opacity, weak governance, or business models that do not warrant disciplined capital. Rejecting biased scrutiny from compromised referees is one thing. Rejecting scrutiny altogether is another.

The ratings agencies are sometimes right for the wrong reasons. Being right lets them avoid examining why the pressure exists in the first place. And being wrong, historically and spectacularly, has cost them nothing that matters.

I reckon Afreximbank was right to walk away. But I also reckon that Cassava's bondholders deserve answers that have nothing to do with Western bias.

Andile Masuku is Co-founder and Executive Producer at African Tech Roundup. Connect and engage with Andile on X (@MasukuAndile) and via LinkedIn.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

BUSINESS REPORT