The prospect of a Ghana energy legacy bond has generated a frenzy of discussion among buysiders, according to two Accra-based analysts and four London-based portfolio managers. Opinion appears divided across geographical lines, however, with the local sources offering up a sonorous endorsement of the issue while the internationals were largely sceptical about the bond.
“I doubt this will happen,” was the first London-based portfolio manager’s pithy assessment of the issue. “There’s no way they will sell 60% of it to international investors. If you find someone who is buying it, let me know.”
Ghana wants to raise GHS 6bn (USD 1.3bn) to GHS 7bn through the issuance, but may need to add more ampage to the deal to spark enthusiasm among foreign investors, they said. The sovereign will use the proceeds of the issue to clear debt owed by Ghanaian energy firms to the banking sector. But some buysiders raised question marks about the rationale behind the issue, the viability of the revenue stream that will service the debt, as well as the overall structure of the bond.
Pros and coupons
“Investors may think it’s a quasi-treasury bond, but it should be considered more of a corporate issuance,” said the first Accra-based analyst, who gave a ringing endorsement of the issue. The bond, which will be issued via a special purpose vehicle, “should be relatively immune from sovereign distress”, he continued. “The government will contribute with GHS 600m towards the coupon payments per year, to subsidise the expected GHS 1.2bn from energy levies. We’ve looked at the numbers, and they add up, we think this is great way of getting into some exotic Ghanaian risk, with little downside.”
A second Accra-based analyst was equally enthused about the looming paper, but added that a decision on whether to buy it would be conditional on the structuring of the deal, which is yet to be confirmed.
“We’ve heard the parameters may be slightly different to that which was originally proposed,” said the second analyst. “Will it be fully or partially guaranteed by the sovereign? That’s the sticking point for us.”
The government will have to pay up to get international funds interested in the issue, according to the first buysider. He said he expected interest from foreign investors to mirror that of the allocations in local treasury bills, at around a 70/30 split in favour of foreign investors. “The average coupon rate for a five- to 15-year local government bond is in the 18% region,” the buysider said. “I think internationals will be looking at 250bps risk premium above that level to get comfortable with the risks associated with it.”
Shock to the system
Ghana has struggled to keep its macro and fiscal policies in line with IMF lending conditions, all six sources agreed. As such, the country is walking an economic tightrope and any new debt could threaten its balance.
The IMF, which has extended its Extended Credit Facility (ECF) to 2018, recently said that the country remains at high risk of “debt distress”, as debt for 2017 is forecast to be 70.9% of GDP – above the fund’s specified 70% threshold.
No matter how the bond is structured it will likely add to Ghana’s external debt, said the first Accra-based analyst, adding that this view that would certainly weigh on investor sentiment. “Treasury distress will have a minute effect on this issue as it’s ring fenced via the SPV,” said the analyst. “For me, I think they [foreign investors] will be more concerned about FX instability and the vagaries of [Ghana’s] expected revenue stream.”
Ghana is looking to service the debt via an Energy Sector Levy Act (ESLA). The process is underway and collections were higher than projected last year, as per the government’s ESLA annual audited report for the full-year 2016. The ESLA bill, formally referred to as Act 899, was passed by former President John Mahama to reduce consumers’ levies on electricity and oil. The intention is to use the proceeds from the levies to ring-fence Ghana’s energy legacy debt, as reported.
Proceeds from the ESLA, passed in December 2015, have allowed Ghana’s energy companies to begin servicing their debts, according to Fitch Ratings. “The authorities are considering an energy bond to resolve the legacy SOE debt, as clearing these NPLs would help improve banks’ balance sheets and lessen the possibility that sovereign support will be necessary to recapitalise domestic banks,” said the rating agency in a note on Friday.
The Ghana Revenue Authority will be responsible for appraising the magnitude of levy on oil market companies (OMC) operating in Ghana. The GRC will obtain the payments from the (OMC), which will then be transferred onto the SPV, before issuance to noteholders. This is a process that most locals were comfortable with, due to the ring-fenced nature of the proceeds from the sovereign.
Blowing a fuse
The views were less sanguine in London though, according to the four portfolio managers. The first buysider voiced concerns about the legal framework of the bond, and particularly that it will be issued under Ghanaian law. The investor questioned whether or not bondholders will be able to enforce their claims in the event of a default. “In a judgment, Dominion vs NIB Ghana, handed down on 21 June, the Supreme Court of Ghana declared that if a plaintiff sued on behalf of someone not resident in Ghana, the names and addresses of the latter had to be included on the writ of summons,” said the first London-based portfolio manager.
“If not, the writ was void,” he continued. “Suppose that a future Ghanaian government interferes with the revenues assigned to the SPV and the Trustee decides to sue the government. If there are any foreign investors, the Trustee will have to give their names and addresses. Without that information, the bond will be in effect unenforceable.”
The buysider was concerned that if the Trustee, which has yet to be confirmed, wanted to sue, then a non-resident would have to authorise the Trustee to include his identity and address in the writ.
“The problem is that if the name and address of just one non-resident holder were omitted, then the writ is void,” he said. “Any subsequent judgment would be set aside, as it was in the case of Dominion vs NIB Ghana. So we have told the managers that we will not consider this bond unless it is governed by English law.”
Other fund managers were equally dismissive about the bond. “There was overhang in the expenditure from the last administration, which has caused the government to miss budget targets,” said a London-based analyst. “Ghana is still riddled with debt, a lot of this debt is clustered together, which will increase their roll over risk, so we a bit concerned about that.”
A second London-based investor scoffed at the first Accra-based analyst’s assertion that foreign investors will would be happy to lap up the issue. “We are not getting involved in this, I can tell you that now,” said a third London-based buysider. “The bottom line is there will be little to no guarantee from the sovereign. Why would I get involved in this, when I can buy a more liquid government bond at 18%?”
In terms of the legal framework, the third buysider was not willing to discuss the legal parameters of the deal as he had yet to do due diligence. Ghana is hoping to bring the energy bond to the market before the end of the month, according to the six sources.
Fidelity Bank and Standard Chartered are working as joint lead managers of the issue, as reported.
by Michael Ogunleye, Priscila Azevedo-Rocha and Asli Orbay