Ghana energy bond challenges EM appetite, despite 20% price talk

20 October 2017

Ghana’s finance minister Ken Olfori-Atta landed in London (19 October), having already visited autumnal New York and Boston, just in time to feel a noticeable temperature drop towards winter. Although billed as a non-deal roadshow, the intention of his trip was to add heat to the African bond market and convince investors to buy into the country’s long awaited GHS 6bn (USD 1.37bn) seven- and 10-year dual tranche energy bond, according to two portfolio managers who attended the meeting and a government source.

The government’s plan is to issue GHS 10bn in total, which it will use to clear debt owed by Ghanaian energy firms to the banking sector, as reported. All three sources confirmed this target size, “but the remaining GHS 4bn will be issued later on,” said the first PM.

Structure matters


Both tranches will have a three-year amortising structure, which Ghana will use as collateral against the Energy Sector Levy Act (ESLA), the first portfolio manager said.

The ESLA bill, formally referred to as Act 899, was passed by Ghana'a parliament and signed by former President John Mahama at the end of 2015 to reduce consumers’ levies on electricity and oil. It went into force in January 2016.

 

Ghana plans to use proceeds from the levies to ring-fence its energy legacy debt, as reported.


Price talks in London, New York and Boston centred around 200 basis points above Ghana local currency Treasury bills for a proposed bond, said the first and a third PM. This reckoning puts the expected issue at around a 20% yield.

 

“On 19 October, the seven-year local currency was trading at 17.3% and the 10-year at 17.6%," said the first PM. "Considering an average yield of 17.5%, the government is looking to price at 19.5%-20% yield.”


“Looking at local yields, this is only attractive for us if they [the government] price it at a 20%,” said the third PM.

 

Once issued, the paper will be documented under Ghana SEC regulations to be listed and traded on the Ghana Fixed Income Market of the Ghana Stock Exchange, as reported.

The documentation will be under English law, said the three sources.

 

Debtwire previously reported that the government’s original plan was to issue under Ghanaian law, but invertors’ concerns on whether or not bondholders would be able to enforce their claims in the event of a default prompted the change of jurisdiction.


Although subject to UK jurisdiction and docs, the bond trustee will be Fidelity Bank Ghana. But this once again raises concerns for international investors on would happen in the case of default.

 

"We are not yet convinced about the structure," said the third PM, adding that he had "never seen a transaction in Africa structured like this in the past”.

 

Another two portfolio managers shared the same concerns. “This is one for the big accounts only,” said one of them.


All about semantics


The paper will be issued via a special purpose vehicle (SPV) and will not be guaranteed by the sovereign, the ministry told investors during the meetings.

 

“The interesting part though is that it will have a sovereign default guarantee clause,” said the first PM, questioning what this effectively mean for investors.


Ghanaians are playing a game of “perception” or semantics, said the second PM.

 

“They don’t want it to appear as though they are in distress," he said. "If they guarantee this issue, it would take their debt-to-GDP to around 76%, compared to its current level of about 68% to 70%."

According to an IMF spokesperson, the Fund will classify the new bond as government debt despite it not having an explicit sovereign guarantee.

 

“The energy bond is expected to be serviced with the proceeds of the Energy Sector Levies, which were introduced by the government in January 2016 to support the restructuring of the energy sector debt," said the spokesperson. "The energy bond is expected to be local currency denominated and, depending on the residency of investors, it will be reflected in domestic or external debt for the purpose of the Debt Sustainability Analysis (DSA).”

 

But the IMF spokesperson added that the Fund had not heard about the sovereign default guarantee and “hence we cannot comment on this".

But this inclusion will have an effect on Ghana’s ability to issue a sovereign Eurobond next year, said the second PM.

 

“What the sovereign default guarantee really means is that, if the sovereign makes alterations to levies that could in any way affect the ability of the SPV to service the debt, bondholders would then have recourse to the government,” he said.

 

Transaction structure

 

According to the presentation, the SPV is ring-fenced, with no cash flows to the sponsor until the bonds are fully redeemed. There is a lock-box for excess levies about the minimum 1.25x Debt Service Reserve Account coverage ratio. The Ministry of Finance GHS 600m committment can also be drawn upon to meet any shortfall.

 

The bonds are split into a GHS 2.4bn  seven-year bond, which amortises in three instalments - GHS 720m on 30 October 2022, GHS 840m on 30 October 2023, and GHS 840m at 30 October 2024. The GHS 3.6bn 10-year bond is repaid in three instalments - GHS 990m on 30 October 2025, GHS 1.08bn in October 2026 and GHS 1.53bn at 30 October 2027 maturity.

 

A breach of the DSCR or including repeal or adverse amendment of ESLA Act and / or intervention in EDRL collection process and failure to remit EDRL flows would constitute an event of default.

 

The bond will become a government obligation if the ESLA act or EDR levy collection is tampered with adversely.


Fidelity Bank Ghana and Standard Chartered are working as joint lead managers of the issue, as reported.


Books are expected to open on 23 October and close on 26 October, inclusive, all sources confirmed.

The Republic of Ghana is rated B- by S&P, B3 by Moody’s and B by Fitch.