Ghana’s external debt: Tough targets, creativity required to lift recovery (2)
As a small trade-off/concession from Ghana, our example would assume that the longest-dated maturities (the current longest-dated maturity is the Ghana 2061 bond) are brought forward, with the 15-year maturity bucket the longest-dated in our example.
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Using an 11 per cent exit yield (the mid-point of what we see as the likely range of 10-12 per cent), the new bond structure would deliver recovery rates of 41-42, with the new bonds trading at an average price just below 70 (per 100 new notional).
While the bonds, due to the below-market-yield coupon of five per cent, would still trade in the discount territory, the distance to par is not as large as it would be in a structure with larger maturity extensions and lower coupons.
Such a structure should make Ghana’s eventual return to markets and pricing a new issue based on the post-restructuring curve easier.
A solution with a 30 per cent notional haircut, a 3-year interest grace period and a 1/3 cut to coupons thereafter (one approach discussed by market participants following the Deputy Finance Minister’s comments along these lines in November last year) would also deliver recovery values just above 40, according to our framework and calculations.
From a bondholder perspective, the benefits from the lower notional haircut would be more than offset by the interest grace period.
Coupon payments after the initial grace period would be just marginally higher than the five per cent we have assumed above (around 5.25 per cent, according to our calculations), but the effect on recovery values from this is rather marginal.
However, this would result in marginally lower NPV debt savings for Ghana, with the IMF’s five per cent discount rate framework slightly under-delivering against the 16 per cent of GDP NPV reduction target for external debt, according to our calculations.
It is worth noting that the comments made by the Finance Ministry in November 2022 about the expected restructuring approach and NPV reductions were likely based on assumptions of a successful domestic exchange programme as initially designed.
The fact that the final exchange - and associated cash flow savings - was smaller than initially anticipated and that other domestic debts such as those held by local pension funds, IPP creditors, etc., are yet to be restructured points to the need for deeper NPV adjustments on the external side.
Moreover, under the IMF’s five per cent discount-rate framework, it would mean that maturity extensions actually add to the NPV of Ghana’s debt, rather than help meet the NPV saving targets.
Hence, while a 30 per cent notional haircut may look more appealing from a headline perspective if this comes with a three-year interest grace period, then we believe this would be an inferior solution for both Ghana and market-value-oriented bondholders.
Upside from current market prices, but speed is of the essence Based on our calculations and on the parameters/targets known to date, we believe that recovery values for eurobond holders in the low 40s are achievable and hence see some upside to current trading levels in the low-to-mid 30s (which also underpins our Overweight rating on the credit).
Of course, if negotiations provide some additional leeway around these targets (or underlying assumptions), this would increase the potential upside.
Similarly, any potential addition of a recovery value instrument, with payments contingent on Ghana’s future economic performance, could have a similar positive effect on overall recovery values.
However, as our discussion above also shows, the room for manoeuvre does not seem large, and given the high opportunity costs of holding defaulted debt in a world of much-increased interest rates, the return prospects for Ghana eurobond holders will ultimately depend on the speed of the restructuring process and bondholders’ ability to realise the potential upside promptly.
Undoubtedly, there are risks to the process, including the likely difficulty for some investors to accept such large haircuts, China’s stance within the G20 common framework 1 (China’s portion of Ghana’s debt load is smaller than in other cases where an agreement with China on equal treatment has remained elusive, but at c.USD1.7bn it is not negligible), the required flexibility of all actors, including the IMF, to find alternative solutions if the process does not move forward at speed within the G20 CF and Ghana’s political cycle ahead of the end-2024 elections.
We also note that the timeline for the IMF board approval of the programme has repeatedly shifted. At the same time, we still think that the starting point for Ghana’s external-debt restructuring is better than in many other cases.
Ghana has already completed its local-debt restructuring (while the scope of local bond inclusion in restructuring efforts is still an ongoing debate in Sri Lanka, for example).
And contrary to Zambia, Eurobonds represent the lion’s share of external debt likely to be in-scope for restructuring, arguably giving bondholders a stronger voice in negotiations.
Not all parameters of the external-debt restructuring are known yet, but authorities’ indications imply a 55 per cent NPV reduction in eurobond debt may be targeted. With some creativity, we estimate such an ambitious target could be achieved with bond recovery values in the low 40s, c.5-8 points above current market prices.
Key takeaways
• Not all parameters are known, but eurobond-debt reduction targets are likely to be very ambitious.
Ghana’s authorities have indicated that to comply with IMF targets, a 16 per cent-of-GDP NPV reduction of external debt by 2028 may need to be achieved in the upcoming restructuring. We estimate that this would translate into an ambitious c.55 per cent NPV reduction for eurobond debt.
• The difference between the five per cent discount rates used by the IMF and likely market-based exit yields may skew bondholders’ preferences towards larger upfront notional haircuts, relative to larger coupon cuts and maturity extensions.
At the same time, maturity and coupon adjustments will also need to be part of an overall solution to provide near-term liquidity relief and to smoothen the debt profile.
• We provide an illustrative example that we believe broadly achieves the outlined targets and results in a recovery value for bondholders in the low 40s.
This implies some upside from current market prices, which could be enhanced if negotiations provide leeway around the targets, or if any additional recovery value instruments are introduced contingent on Ghana’s future economic performance.
However, a speedy process allowing investors to realize the potential upside is of the essence, and risks to this are non-negligible.
