2020 Eurobond offers crucial public debt refinancing options

Finance Minister; Ken Ofori-Atta

Ghana’s latest, and eminently successful Eurobond issuance, completed mid-week, enables government to engage in critical refinancing of its public debt as the first maturities of the series of annual issuances done during the past decade begin to fall due. The record length of the 2020 Eurobond issuance – including a 41 year tranche that is the longest ever by an African country – coupled with lower coupon yields than previous issuances, gives government a great deal of flexibility as it deals with urgent public debt refinancing.

While government has declined to provide a breakdown of its intended allocation of the proceeds of this week’s US$3 billion issuance, between its stated purposes of supporting budgetary spending on infrastructure, restructuring of the energy and financial services sectors, and liability management – which means public debt refinancing – the five percent cap on the fiscal deficit for 2020 means most of the incoming new debt proceeds will go into restructuring of existing debt. Government’s refusal to provide a breakdown is ostensibly to allow it flexibility, being that this is an election year, but the combination of the fiscal cap and impending major debt maturities will minimize that flexibility.

Most urgent is the 2016 Eurobond issued by the Mahama administration during its final year in office. This was Ghana’s fifth Eurobond, of US$750 million, at a 9.25 percent yield, with maturity period of 5 years; the shortest period in the history of Eurobond issues in Ghana. The principal will be expected to be repaid in three instalments with the first one, of US$250 million falling due in September this year, and the other two falling due in September 2021 and September 2022 respectively.

Next are the outstanding Eurobonds expected to mature in August 2023, valued at US$ 1 billion at 7.875 percent coupon rate and more in January 2026, valued at US$ 1 billion at 8.125 coupon rate.

The 2020 issuance also offers government the opportunity to replace some of the domestic, cedi-denominated debt held by foreign investors, which stood at GHc25,305.2 million as at November 2019. These are relatively the most volatile debt with foreign exchange obligations because of the relatively short tenors of some of it – starting from two years – and the fact that the investors are taking the forex rate risk, meaning that cedi depreciation may send them fleeing, which in turn accelerates the depreciation rate, as happened during the first ten weeks of 2019. Both Finance Minister Ken Ofori-Atta and Bank of Ghana Governor, Dr Ernest Addison, are in agreement that there is the need to reduce government’s reliance on this form of public debt.

On Tuesday, February 4, 2020, completed the issuance of a US$3 billion Eurobond in three installments with interest rates which are better than what was realized in similar bonds issued in 2019.

The three-tranche bonds were sold with 7-year, 14-year, and 41-year maturities.

Government accepted US$1.25 billion for the 7-year-bonds at a coupon rate of 6.375 percent. This compares favourably to an exact same tenor bond government issued in 2019 with a coupon rate of 7.875 percent.

It was also successful in securing US$ 1 billion with a maturity period of 14 years at a rate of 7.75 percent. This rate also beats the 8.125 percent the government accepted for 12-year bonds issued as part of the 2019 Eurobond issuance.

Despite 2020 being an election year, the sterling investor confidence in the country has been demonstrated by the competitive rate of 8.75 percent at which the 41-year Weighted Average Life (WAL) tranche of US$ 750 million, which matures in 2061. This remains the longest-ever tenor bond issuance by an African issuer, and compares to a rate of 8.95 percent on the 31-year bonds issued in 2019.

The yield for the longest-maturity instrument dropped from the initial guidance of 9.125 percent and is the highest-yielding sovereign Eurobond of the year so far.