CDB provides $10 billion to Government of Angola to recapitalize Sonangol and prepay outstanding debts (Linked to Record ID#66847, #87051, 95415)

CDB provides $10 billion to Government of Angola to recapitalize Sonangol and prepay outstanding debts On December 9, 2015, China Development Bank (CDB) entered into a $15 billion loan agreement (captured via Record ID#66847) with the Government of Angola.

The loan is an oil prepayment facility with repayments being serviced through receivables from a designated oil contract.

The pricing structure of the loan allows the Government of Angola to benefit from an upside in an increase in the price of oil. The loan has a maturity of 12-years and its availability period expired on December 9, 2017.

As a condition of the loan agreement, the lender required the borrower to maintain a minimum cash balance of approximately $1.5 billion in an escrow account known as the Debt Service Reserve Account (DSRA).

The proceeds of the loan facility were used to be used to recapitalize Sonangol, help Sonangol prepay some of its outstanding debts to CDB, and finance a series of public investment projects. As of December 31, 2017, the loan had achieved a 100% disbursement rate. Repayments commenced in 2018.

The loan’s (principal) amount outstanding was $14.9 billion in December 2018, $14.5 billion as of June 30, 2019, $11.3 billion as of December 31, 2021, $10.1 billion as of March 1, 2024, and $8.8 billion as of June 30, 2024.

In 2016, China Development Bank approved a $10 billion subsidiary loan through this facility (captured via Record ID#53063) to enable the Government of Angola to recapitalize Sonangol — Angola’s state-owned oil company — and help Sonangol prepay some of its outstanding debts to China.

Sonangol had previously borrowed $7.5 billion from CDB between 2010 and 2014, and through an on-lending arrangement with the Government of Angola, Sonangol used $6.9 billion of the proceeds of the $10 billion loan to prepay several outstanding debts to CDB, including a $2.5 billion loan in 2010 for the Phase 1 of Kilamba Kiaxi Housing Construction Project (captured via Record ID#47101), a $2 billion loan in 2011 to support Sonangol’s development efforts (captured via Record ID#47102), and a $1 billion loan in 2012 to support Sonangol’s development efforts (captured via Record ID#47103).

According to the IMF, the $6.9 billion that was on-lent to Sonangol (as part of the $10 billion subsidiary loan) had a net value of $3.8 billion because part of it was used to refinance existing debt, implying that only $3.1 billion was used for re-financing.

According to the IMF, after this recapitalization, Sonangol ‘significantly reduced its external debt, which [was] projected to decline to about US$5 billion at end-2018, from US$12.9 billion at end-2015.’ Therefore, rather than having the country’s state-owned oil company struggle to pay back CDB loans that were coming due, the Government of Angola effectively moved Sonangol’s CDB debts onto its own balance sheet.

There are clear indications that the December 2015 CDB loan financially underperformed vis-a-vis the original expectations of the lender.

In December 2020, the China Development Bank (CDB) and the Ministry of Finance of Angola entered into an agreement to reprofile multiple loan agreements that they had previously signed (captured via Record ID#95415), including the $15 billion loan agreement from December 2015 (captured via Record ID#53063).

The December 2020 agreement included (i) a three-year deferral of principal payments; and (ii) repayment of deferred principal falling due in 2020H2–2023H1 over seven years after the grace period, with some additional modest relief of principal in 2024–25.

Under the December 2020 debt reprofiling agreement with CDB, the Government of Angola also agreed to use the outstanding cash balance in an escrow account — known as the Debt Service Reserve Account (DSRA) — to make interest payments to the CDB between 2020 to 2022, which it expected would bring the DSRA balance to nearly zero by mid-2022.

However, under the terms of the debt reprofiling agreement, the parties agreed that the borrower would need to replenish the DSRA to approximately $1.5 billion (the minimum cash balance previously agreed upon by the lender and borrower) by 2023.

However, in anticipation of the escrow account balance being depleted to nearly zero by mid-2022, CDB demanded that the borrower replenish the account to $1.5 billion by 2023. The Government of Angola met this escrow account replenishment condition.

Then, in 2023, the Government of Angola was scheduled to resume principal payments to CDB under the terms of the reprofiling agreement.

However, according to the Financial Times, the resumption of principal payments 'exacerbated a sharp economic downturn in Angola’s economy and hit its currency, the kwanza.' In mid-March 2024, CDB and Angola's Ministry of Finance amended the debt profiling agreement (ahead of a $1.7 billion scheduled repayment in late-March 2024).

CDB required Angola's Ministry of Finance, under the terms of the amended agreement, to deposit more than $1.5 billion in the cash collateral (escrow) account when the international price of oil increased to more than $60 a barrel.

However, CDB allowed Angola's Ministry of Finance to use any surplus funding in the cash collateral (escrow) account -- above the $1.5 billion minimum balance requirement -- to be used for interest payments.

At the time that the amended agreement was signed, Angola's Ministry of Finance reported it was able to make additional monthly interest payments to CDB worth $150 million to $200 million, thereby allowing it to pay down its debt to CDB on an accelerated schedule.

Then, in August 2024, Angola's Finance Minister Vera Daves de Sousa announced that the government might not be able to pay wages to public sector employees for a second consecutive month due to a funding gap caused by a mismatch between revenues and expenditures.

Elaborating on this point, she explained that most of the government's revenue was being used to service its external debt obligations, with repayments automatically debited from lender-controlled escrow accounts. She further explained that this mismatch limited the government's ability to build a financial safety net.