The Eurobond: Have we been thrown a lifeline?
Last week Thursday, Ghana sold a US$1billion Eurobond at a coupon rate of 8.125 per cent. This is lower than what many market watchers had expected especially given that the economy had had its fair share of challenges - this year in particular. The bond was oversubscribed with orders of up to US$3 billion.
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The bond is a soft amortising one, amortising in years 2024, 2025 and 2026 with principal repayment in three installments of $333 million in 2024 and 2025 and $334 million in 2026, according to the Finance Minister, Mr Seth Terkper.
Ghana sold Eurobonds in 2007 and in 2013, when the yield was 8 per cent, but analysts expected a higher rate this time. The rate reflected the appetite for relatively risky sovereigns given lower yields in developed markets.
It was only logical that many had expected a high rate this time especially when the government was wrestling escalating inflation, a falling currency and a stubbornly high budget deficit.
Normally when bonds are issued, investors look out for certain things. First, they want to know whether there will there be sufficient cash flow in the future to pay this, and other debt obligations. They also want to know what the risks are in getting their money back. They are interested to know the credit worthiness of the issuers, the price, among other things.
Mr Terkper has answers to the questions. He explained in a statement after the floatation: "Investors saw fundamental long-term value in the Ghanaian economy. We have always emphasised that the mid-term prospects for Ghana were bright and with the coming on board of IMF, we hope to come out of our short-term challenges pretty soon."
Already the good tiding of the successful floatation of the bond is impacting positively on the cedi. Last week, the cedi headed for the biggest weekly gain in more than 14 years on speculation that a $1 billion Eurobond sale would boost foreign exchange supplies as the nation seeks International Monetary Fund (IMF) budget support. This could give the government some breathing space as well as a much-needed source of debt finance.
The cedi strengthened 1.7 per cent to 3.5775 per dollar by close of the week. That extended its five-day appreciation to 5.5 per cent, the biggest weekly increase since January 2000, according to data compiled by Bloomberg.
Timing of the issuance
Timing, they say, is everything. And either by a clear strategic move or sheer luck, the timing of the bond was so perfect, given the imminent IMF talks. Although government officials might not admit it, it gives them a stronger negotiating position with the IMF.
Already, a Deputy Minister of Finance, Ms Mona Quartey, said last week that Ghana would not be seeking for a bailout from the IMF, but would rather seek for financial and technical assistance. This position resonates well with the tenets of prudent economic management.
The Eurasia Group political risk consultancy said the government was seeking to play investors and the fund against each other.
"Its (the government's) strategy is to use its recent IMF outreach to bolster investor confidence on the eve of its bond issuance while simultaneously leveraging the Eurobond to strengthen its negotiating position with the fund," Eurasia said in a research note.
Instructively, other African countries have the same appetite as Ghana to seek funds from the international market. Bond issuance volumes from sub-Saharan African have already surpassed last year’s levels with the promise of more to come and Nigeria leading the trend of corporate issuance.
African and African-related issuers, excluding South Africa and the Maghreb region, have already raised US$9.35bn, as of July 25, according to IFR data. That compares with US$8.28bn in 2013.
African markets
The increase in issuance out of sub-Saharan Africa reflects investors’ search for higher yielding assets as well as portfolio diversification. In July alone, seven issuers with Sub Saharan African interests have issued bonds raising US$3bn (South Africa and Tunisia also sold bonds last month).
Bankers say investors are also being swayed by Africa’s growth potential.
“They want to know what the money is being issued for. They want to buy into the African growth story, and the focus for them that the use of proceeds are viable investments that return high profits in a quick amount of time. Investors are not just looking at comparables when looking at Africa now, they are investing in the fundamentals, and this can prove to be good value for those searching for higher yielding returns,” said Nicholas Samara, Vice President, CEEMEA debt capital markets, Citigroup.
It’s a view shared by Mahan Namin, Portfolio Manager at Insparo Asset Management. “Sub-Saharan sovereign borrowers have recently been able to issue 10-year paper at yields around the 6 per cent level, which is very good by historical standards, particularly given the increased pace of issuance out of the region in the last couple of months. Also, many of the borrowers are no longer debut issuers, another reflection of how the landscape has changed and why investors are more comfortable buying.”
Outlook
The country is a rarity in West Africa due to its record of political stability and sustained strong economic growth, and these attributes make Ghana an attraction to foreign investors.
Of course, the inflows from Eurobond, and the US$2 billion cocoa syndicated loan will ease the exchange rate losses but the budget and current account deficits, increased debt stocks and structural weaknesses will still continue to exert enormous pressures that could easily bring the country back to the brink again.
Time will tell if we have been thrown a lifeline.GB