The controversy behind the 15 year bonds; The facts behind the politics

At the beginning of April this year, the Government of Ghana seemingly took a giant stride in its ongoing efforts to deepen the country’s capital market with the introduction of 15 year cedi-denominated treasury bonds. Prior to the initial issue at the turn of the month, the longest tenured bonds issued on the domestic market by government have been 10 year bonds.

The international financial portfolio investment community has reacted to this with enthusiasm. Investors offered to buy GHc3.427 billion worth of the bonds, although government actually took a slightly lower amount of GHc3.422 million. Most of the bonds – over 90% – were bought by foreign investors, indeed the overwhelmingly predominant one being Franklin Templeton an American fund management firm.

But this predominant off-take by Franklin Templeton has generated an unsettling controversy, initiated by the main opposition party, the National Democratic Congress, which claims that the bond sales process was rigged by Finance Minister Ken Ofori-Atta, who has a conflict of interest between his ministerial position and his relationship with Trevor Tregarme, who is both on the Board of Franklin Templeton and Chairman of Ghana’s Enterprise Insurance Group, a company in which Ofori-Atta’s wife, Dr Angela Ofori Atta also serves on the Board.

Indeed, the NDC points out that the bonds were only open to subscription by investors for one day, whereas similar issuances done in the past using the same process were open for subscription for three days. This, the NDC argues, proves that the issue was arranged for a particular investor – Franklin Templeton.

The NDC further has alleged that since the bonds were subscribed mainly by foreign investors who converted foreign currencies to invest in the cedi denominated bonds – and whom will thus be entitled to convert their cedi investment proceeds back to forex upon maturity or secondary market sales or early exit by discounting – the bonds actually amount to a foreign loan and therefore should have been subject to Parliamentary approval prior to their issuance. FinalLy, the NDC argues that the pricing of the bonds was too high – ostensibly to reward the favoured majority investor – and that the issuance makes Ghana’s forex exposure on its public debt inordinately high.
Unsurprisingly, the Ministry of Finance has quickly responded to the allegations and indeed is convincing with regards to most of them.

Actually, the relationship between Ken Ofori-Atta and Trevor Tregarme is tenuous at best. Neither Tregarme nor Dr Ofori-Atta hold executive positions in Franklin Templeton or Enterprise Group respectively. However, the allegations have got tongues wagging on the grounds that Dr Ofori-Atta’s is the largest single individual shareholder in the Enterprise Group and there are suspicions, albeit completely without any concrete evidence of any sort, that she is holding those shares on behalf of Ken Ofori-Atta himself. This speculation is intensified by the fact that Ofori Atta’s long standing business partner, Keli Gadzekpo, with whom he co-founded and nurtured Databank, the investment bank which they own together, is the CEO of the Enterprise Group, having left his position as CEO of Databank itself to take up his current appointment.

However, as both the Ministry of Finance and the three institutional book runners that actually conducted the recent bond sale – Barclays Bank, Stanbic Bank and Strategic African Securities – point out, the structure of the latest bond issuance is exactly the same as that for all the medium and long term bonds issued by every successive administration since the Kufuor administration opened the door to foreign investors in 2006. They further insist that the only reason why the latest issuance was opened to investors for one day rather than the previous three days is that there was no need to keep it open any longer since investors had already committed to buy up the entire sale.
To be sure, the three book-runners were actually appointed by the NDC’s Mahama administration when it opted to change over from the erstwhile Bank of Ghana auction system of medium and long term bond issuance to the current book building system in November 2015. Instructively, the Ministry of Finance, under that NDC administration, over the following 13 months, loudly lauded the performance of those same book runners that it is now accusing of being part of the incumbent Finance Minister’s conspiracy to favour a particular foreign investor.
Just as instructively, Franklin Templeton has been a regular, large scale, buyer of Government of Ghana bonds over the past decade, including those issued when the NDC was in office.

The new bonds were issued at a yield of 19.75% which was within the initial price guidance range of 18.15% to 19.85% announced prior to the issuance by government’s three book runners. The NDC argues that this coupon rate is much higher than the coupon rates on any of the Eurobond issues it did while in office, the highest indeed being 10.25%.
However bond market analysts point out that this is like comparing apples with oranges, in that with Eurobond issues, government incurs the foreign exchange rate risk, which is appreciable considering that the cedi continually depreciates against the US dollar in which Eurobonds are denominated; whereas in cedi denominated bonds the investors themselves incur this risk and so it has to be compensated for in the coupon rate. Indeed, in criticizing the coupon rate on the new bond issue as too high, the NDC failed to remember that over the past four years all its medium and long term cedi denominated bond issues have been done at significantly higher rates – most at over 24% – even though their tenors have invariably been shorter.

Ironically, it is the aspect of the bond issuance that the NDC emphasized the least that actually represents the greatest problem for the Ghanaian economy going forward: the inevitable foreign exchange exposure that comes with taking what is effectively a foreign loan even though it is classified as a domestic loan. Again though, even where the NDC did mention this it failed to mention that it is just as guilty as the NPP government that has succeeded it.
It is instructive that the Kufuor administration opened up medium term bonds fo foreign investors in the first place because it needed investors willing to buy bonds of longer tenors than local investors are willing to, at lower coupon rates and perhaps most importantly, who would invest in cedi denominated bonds by converting their foreign exchange. This means foreign investors provide the forex Ghana so direly needs and take up the exchange rate risk themselves, rather than put it on government as in the case of direct foreign loans.

But government still incurs the forex exposure created through issuance of bonds to foreigners, since it has to guarantee that foreign investors can convert their cedi investment proceeds back into the foreign currencies they converted in the first place, whenever they exit from their investment.To this extent NDC is right in claiming that cedi bonds sold to foreigners are in truth actually foreign loans. Curiously though, the NDC itself has been classifying them as domestic loans for the past eight years while it has regularly been issuing them.

The danger is that each time the cedi depreciates, foreign bond holders sell their investments on the secondary market or through bond discounting to forestall their exchange losses and their consequent demand for forex to finalize their dis-investment process puts immense pressure on the local forex market, thereby worsening the situation.

Currently, about one-third of Ghana’s public debt that is classified as domestic debt is in reality foreign debt. However, because Ghana needs more and more forex – including that needed to meet forex obligations on maturing (or discounted) bonds held by foreigners – government continues to issue more of them rather than less. It is instructive that each successive administration since Kufuor’s has issued larger volumes than the previous one and the early signs are that the Akufo-Addo administration will be no different.

However, while the current government is proving as guilty of this as its predecessors, its critics are generally at a loss as to how the latest bond issue gives more rewards to the investors who bought into it than those reaped from previous issues. The most sensible theory so far is that the novel callable feature in the issuance, which allows government to call in the bonds at any time by amortizing them early, enables the Finance Minister to effectively turn the 15 year bonds into an issuance of much shorter tenor, even as the investor enjoys a coupon rate based on the full 15 year tenor. Only time will tell whether there is any truth to such speculation.

On the other hand though, supporters of the issuance point out that the NDC has succeeded in its aim of simply muddying the waters, by turning what was supposed to be a crowning achievement by the new government into one that is now widely regarded as suspicious by many people just because they do not understand the technicalities nor the history of domestic bond issuance to foreign investors.

The success of the newly introduced long term bonds had been widely seen as a vote of confidence by the international investment community in the President Akufo-Addo administration’s ability to improve Ghana’s economic fortunes, especially with regards to debt sustainability and the stability of the cedi. Now it has simply divided the country along political lines.

Source: Toma Imirhe || The Corporate Guardian

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