OTX — FX-Indexed Treasury Bonds

Overview

OTX (Obrigações do Tesouro Indexadas) are foreign-currency-indexed Treasury bonds issued by the Republic of Angola through MINFIN. While denominated and settled in kwanza, OTX bonds are indexed to the USD/AOA or EUR/AOA exchange rate, meaning that both the principal and coupon payments adjust to reflect currency movements. This structure provides investors with protection against kwanza depreciation — the most significant risk factor for foreign and FX-sensitive investors in Angola’s capital markets.

Instrument Characteristics

How FX Indexation Works

The defining feature of OTX bonds is their exchange rate linkage:

1. At issuance: The bond’s face value is set in kwanza with a reference exchange rate (e.g., USD/AOA at the auction date)
2. At coupon payment: The coupon amount is adjusted by the ratio of the current exchange rate to the reference rate, providing additional kwanza if the currency has depreciated
3. At maturity: The principal redemption is similarly adjusted, protecting the investor’s USD-equivalent capital value

For example, if the reference rate was 900 AOA/USD at issuance and the rate is 914.60 at coupon payment, the investor receives proportionally more kwanza to compensate for the 1.6% depreciation. This mechanism effectively creates a synthetic USD-denominated bond without the legal and settlement complexities of an actual foreign currency instrument.

Strategic Role in Angola’s Debt Market

OTX bonds serve several important functions:

• Foreign investor attraction: By mitigating the primary risk (kwanza depreciation) that deters international capital, OTXs lower the barrier for foreign portfolio investors accessing Angola’s debt market through custody accounts
• Domestic FX demand management: OTXs provide domestic investors with a regulated alternative to holding physical USD, potentially reducing pressure on the FX market and BNA reserves ($15.3 billion)
• Yield curve extension: OTXs enable MINFIN to issue longer-dated debt than might be achievable with pure kwanza instruments, as the FX protection reduces the risk premium investors demand
• Debt management flexibility: The FX indexation allows the government to borrow at lower nominal yields (since the FX component substitutes for a higher risk premium), though it creates contingent liabilities if the kwanza depreciates significantly

Pricing Dynamics

OTX yields reflect a different risk profile from OTNR (fixed-rate kwanza) bonds:

OTX yields are typically lower in nominal kwanza terms than OTNR yields of comparable maturity, because the FX protection reduces the risk premium demanded by investors. However, the effective USD-equivalent yield is what matters for international comparisons.

Investor Base

OTXs attract a broader investor base than pure kwanza instruments:

• Foreign portfolio investors: OTXs are the preferred instrument for international capital entering Angola’s fixed-income market
• Domestic banks with FX liabilities: Banks like BAI, BFA, and Standard Bank Angola use OTXs to match FX-denominated deposits and liabilities
• Insurers and pension funds: ENSA and institutional investors use OTXs for FX-protected long-duration allocations
• Central bank: The BNA may hold OTXs as part of its monetary policy toolkit

Investor Considerations

OTX bonds are the instrument of choice for investors seeking Angola sovereign credit exposure with reduced currency risk. Key considerations include:

• Exchange rate trajectory: At USD/AOA 914.60, the pace and direction of future kwanza moves determine the magnitude of FX adjustments
• Liquidity: OTX secondary market liquidity varies by maturity and may be thinner than BTs or shorter-dated OTNRs
• CEOC treatment: Foreign investors should confirm that capital markets exemptions apply to OTX transactions
• Sovereign credit: OTXs carry the same sovereign credit risk as all Angolan government debt (S&P B- / Moody’s B3 / Fitch B-)
• Settlement mechanics: Understanding the exact indexation formula, reference rate source, and payment timing is essential for accurate return calculations

OTXs complete Angola’s sovereign debt instrument suite alongside Bilhetes do Tesouro (short-term) and OTNR (fixed-rate long-term), providing the FX-protected component that is critical for attracting international capital to BODIVA.