Sonangol’s Debt Woes

Angola’s state oil giant, Sonangol, is running out of time to prove it has a credible plan to repay US $13 billion in loans it obtained from a syndicate of European banks.

The loans’ agreements came with a contractual obligation to produce annual balance sheets showing a healthy ratio of debt to capital and it appears Sonangol has been unable to honour this.

Last month the London-based Standard Chartered Bank set a 45 day deadline for Sonangol to explain its failure to comply with the debt ratio obligation stipulated as part of the loan agreement, and to provide documentary evidence that is has the capacity to honour the terms of the loan.

Sources close to the Board of Directors of Sonangol have indicated to Maka Angola that the company may not be in a position to make the repayments on time.

It is alleged that Sonangol’s long-term auditor EY raised objections to some creative accounting which the Angolan company hoped would diminish the scale of its financial problems, improve the debt ratio and satisfy its syndicate of creditor banks.

One aspect of the plan was to transfer US $5 billion of Sonangol’s debt off the books overnight, on the grounds that this was a sum disbursed towards the National Housing Project and is therefore a debt “owned” by the state.   This expediency would reduce by almost half the amount of debt being carried by Sonangol.

In addition, the new Sonangol board wants to change the way it reports its revenue.

Corporate income statements listing revenues and expenses for the accounting period typically show more than one measure of pre-tax profits, e.g. EBIT (Earnings before interest and taxes) and EBT (Earnings before taxes).  The primary difference between the two is that EBT factors interest into its calculation, while EBIT does not, and as a result this provides a slightly different perspective on the financial health of the company, depending on how much interest is owed on any loans taken out by the company.

Since 2013, Sonangol’s annual balance sheet has only shown a credit because of successive re-valuations of its assets rather than cash flow, valuations which the auditors were unable to justify.

Thus, after 11 years, EY has been replaced by another of the ‘Big Four’ auditors, KPMG.  The man in charge of KPMG Angola is none other than Sikander Sattar, who has been in charge of KPMG Portugal, where he came under fire for the part he played (or failed to play) in the contentious collapses of the Banco Espírito Santo (BES) in Portugal and its Angolan subsidiary (BESA).

KPMG was the official auditor of both BES and BESA. It was blamed for failing to avert BES’s over-exposure to risk when BESA offered unsecured loans worth more than three billion euros.  Some analysts suggest that as a result, international financial markets have lost confidence in KPMG.

Added to this there are scant reasons for optimism about the short-term financial health of Sonangol. Last year, the former chairman of the board of Sonangol, Francisco Lemos, went public with a claim that the national oil company was effectively bankrupt. Despite subsequent official denials, time has shown that Francisco Lemos wasn’t far wrong.  Given the iconic status of Sonangol as Angola’s primary source of foreign revenue, it took courage to turn whistleblower and alert the public to Sonangol’s impending implosion.

Evidence of this came in the stunning announcement made recently by President José Eduardo dos Santos that Sonangol had been unable to make any contribution to the State Budget since last January.

His response to the impending disaster has proved a source of further anxiety to the international financiers who have lent so much to Sonangol.  Contrary to law and common sense, he appointed his daughter, Isabel, to take over as chair of the Board. Isabel lost no time in assigning to herself direct responsibility for the key portfolio of financing (Sonangol Finance).  That places Isabel dos Santos squarely in charge of the Money.  Additionally, there is a clear conflict of interest given Isabel dos Santos is both a shareholder and debtor of thanks to her business interests in UNITEL and GALP, in a joint-ventura with Sonangol.

No wonder then that Sonangol’s creditors say they have reached breaking point.  Representatives of both European and North American financial institutions have told Maka Angola that they are now starting to distance themselves from any business with Sonangol, because they fear that it will breach international laws.

Their concerns are two fold: having a politically-exposed person in charge of Sonangol;  and, that this person simultaneously controls other companies (e.g. UNITEL) whose shareholders are owed dividends (Portugal Telecom), formally approved by their Annual General Meetings, but still unpaid due to internal disputes.

Add this to the continued slump in oil prices and growing evidence about Sonangol’s poor state of financial health, and international financial experts say there are now grave concerns about Isabel’s ability and willingness to meet the company’s international contractual obligations.  The future for both Sonangol – and Angola – is looking rather bleak.