Ghana’s most recent venture into the international debt markets was a success, says bankers who worked on it, even though the $1 billion Eurobond priced at a yield of 10.75% in the primary markets – higher than any other African Eurobond issued this year.
|The sovereign issued in a volatile and challenging market, but with the|
World Bank Guarantee, Ghana has a two notch rating upgrade
The deal was buoyed by support from the World Bank Group, which through the International Development Association (IDA), guaranteed $400 million of the issue.
The Eurobond achieved an order book of just over $2 billion, despite market volatility in emerging markets as a result of poor global growth, the slowdown in China and concern about interest-rate hikes in the US, among other factors.
“The sovereign issued in a volatile and challenging market, but with the World Bank Guarantee, Ghana has a two notch rating upgrade and we calculated that the bond actually priced 200 basis points tighter than a standalone issue by Ghana would have,” says Jonathan Brown, head of fixed income syndicate EMEA for Barclays.
“Moreover, the roadshow highlighted to investors Ghana’s efforts to get fiscal spending under control and its commitment to the IMF programme,” he says. “Investors that had invested in Ghana before, and other emerging market investors, were attracted to the issue.”
Moody’s rated the bond B1 and Fitch made it BB-. Without the World Bank guarantee, Barclays would not have encouraged Ghana to issue a bond at this time, says Brown.
Trent Wilkins, from Barclays’ CEEMEA debt capital markets team, adds: “Raising debt in the international market was a more optimal solution for Ghana, given the current high yields in the local debt markets at around 25%.” He says going to the international market enabled a longer duration issue than could have been achieved locally.
Philippe de Pontet, head of the Africa practice for Eurasia Group, says: “Ghana’s borrowing costs were always going to be expensive given the global context and the pressure the economy is currently under, but investors who buy Ghana are interested in the medium to long term.” He expects Ghana to be back on track in 12 to 18 months.
Standard Chartered Bank, Barclays Bank and Deutsche Bank were lead managers and book runners for the bond issue, with proceeds being used to refinance local currency debt due to mature at the end of October.
The back-end amortising notes were priced on October 7 for $1 billion over 15 years, making Ghana the first country in the region, aside from South Africa, to issue a bond of this maturity. Redemption payments will be in three instalments in 2028, 2029 and 2030.
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“The deal was a great success and was timed well, issued after September when volatility was at its highest. We haven’t seen a bond structure like this since around 2000 and this could set a precedent for other countries in emerging markets to follow suite,” says Maryam Khosrowshahi, head of public sector coverage CEEMEA at Deutsche Bank. “Not only has this issue extended Ghana’s yield curve, but it has also had a halo affect on the curve: the latest bond is trading well in secondary markets and the last issue – Ghana’s 2026 Eurobond – has also tightened.”
As of October 19, yields on Ghana’s $1 billion Eurobond issued last year were 10.36%.
Yields on the bond issued last month had tightened to 9.82%
“This is a new product for sub-Saharan Africa, but is applicable to the rest of the region. I don’t think there will be a rush of issues at the moment, but it will definitely lead to some conversations,” says Brown.
There is, however, some concern over Ghana’s debt sustainability. “There is no additional revenue coming from anywhere at the moment due to current market conditions and NPLs in the banking sector are rising because debtors are unable to pay their loans,” says David Marfo-Ahenkorah, research associate at African Alliance. “Moreover, it is worrying that Ghana continues to issues debt in order to maintain payments on old debt. This isn’t sustainable for the country.”
Ghana was once the poster child for sustainable African economic development, but its economy has recently come under the spotlight for all the wrong reasons.
Low commodity prices and exports, and extensive subsidies have taken a toll on government coffers. The cedi has lost nearly half its value against the dollar in the last 18 months and inflation has been on the increase since January 2015, hitting 17.9% in July before coming down slightly to 17.4% in September.
Ghana’s dire economic situation led to an IMF programme worth $940 million over three years, in February 2015. Since then, the IMF has been working with Ghana to get its finances in shape, reducing subsidies, cutting the wage bill and improving private sector development.
On the surface things are looking up for Ghana. While the country still runs a double deficit, figures are much lower now than at the beginning of the year. In June, Ghana’s current account deficit was 2.6% of GDP while it’s fiscal deficit was 2.2% of GDP compared to 13.2% and 9.6% respectively, in February.
“In theory, recent debt issues should help sustain the country’s foreign exchange reserves which were calculated at $4.4 billion in July 2015,” says Marfo-Ahenkorah. “But because on average, trade imports have been $1 billion on a monthly basis, reserves will begin to deplete because recent debt raised will not be enough to fill the gap.”
He adds: “Come January 2016, we may find ourselves back to square one.”