Ghana breaks sub-Saharan Africa records with Eurobond

After a delayed start, and in volatile conditions for emerging market sovereigns, Ghana successfully issued the longest ever sub-Saharan African bond, and the first to be guaranteed by the International Development Association (IDA). In an inversion of the normal routine, the Ghanaian government is borrowing abroad because it is easier than borrowing at home. 

Having been one of Africa's most successful economies, Ghana recently had to call on the aid of the International Monetary Fund (IMF), with whom it agreed a three-year $918m extended credit facility earlier in 2015 to support its economic reforms. Its fiscal position had been deteriorating rapidly, with falling revenues and government overspending, notably on public sector wages. The budget deficit has been accompanied by a current account deficit, compounded by a weakening currency and, since Ghana is an oil exporter, falling oil prices. While growth has halved since 2012, inflation has doubled, to nearly 18%, and matters are made worse by an ongoing energy crisis.

International solution 

The IMF has completed its first, generally positive, review of the country and made a second disbursement. It described Ghana's implementation of its programme as "broadly satisfactory, despite an unfavourable economic environment". Among Ghanaian investors, however, there is so little faith in the immediate economic future that the government has had to scrap a series of domestic bond issues. To flush out buyers in local bill and bond auctions, the government has been having to pay 25% for tenors of no more than two years. So when it contemplated how it would refinance a some of its expensive near-term domestic debt, the answer was to come to the international markets, with some form of multilateral support. 

The World Bank has long been supportive of Ghana and has advanced some $4bn to its government and public sector by way of loans and guarantees. Now the IDA, part of the World Bank Group, offered the sovereign the option of a $100m direct loan, or of leveraging that by four-to-one with a policy-based guarantee for $400m of the bond issue – 40% of its notional size. This would help Ghana to fund itself at a lower cost than would otherwise have been possible – or, indeed, to fund itself at all. 

The guarantee uses a first-loss rolling structure whereby the IDA guarantees any missed coupon or principal repayments over the life of the bond, up to an amount of $400m. Incorporating it into the structure of the bond enabled the note's rating to be raised two notches above that of the sovereign, from B3/B (Moody's/Fitch – both with a 'negative' outlook) to B1/BB-. The guarantee is the first from the IDA as such, and the first by a World Bank entity since 2001, when the beneficiary was Colombia.

Choppy waters 

In July, the Ghanaian parliament had approved the government's request to raise $1.5bn in Eurobond markets during 2015 to support the current year's budget and refinance domestic and external debts. Barclays, Deutsche Bank and Standard Chartered were mandated to lead a benchmark deal, and began roadshowing towards the end of September. A $1bn transaction would optimise the guarantee, but any size from $500m to $1bn would have been reckoned a success, according to bankers close to the deal. 

The market for emerging market securities had been choppy all month, as economic news out of China deteriorated, and fears grew about the effect of a US interest rate rise on emerging market currencies. But when the US Federal Reserve abstained from a September hike, it blamed fears over Chinese and global growth, which did nothing to soothe investors. 

Ghana had been hoping to issue at about 9.5%, according to wire agency reports, and was disappointed to discover that the market was demanding closer to 11%. The launch was postponed. The following week, however, bankers saw the stability they needed and were confident they could conclude at least a $500m transaction. 

Initial price thoughts were, as the market had been demanding, in the 11% area. By the time the London market closed, the orderbook stood at more than $2bn. This was helped by the fact that, with its guarantee, the deal had attracted emerging market investors who would not normally buy African sovereigns, or Ghana as rated without the IDA backstop. 

Another benefit of the guarantee was a tenor extension to a 15-year final maturity (with back-end amortising over years 13, 14 and 15 giving a weighted average life of 14 years). The $1bn deal was priced at a final yield of 10.75%, about 200 basis points lower than where Ghana could have issued without the guarantee.