The much anticipated long term energy bonds will be issued imminently, but key decisions as to their structure still have to be made. TOMA IMIRHE examines what they are and their implications for the resolution of Ghana’s energy sector financial troubles
Some six months after the President Nana Akufo-Addo administration first announced its intention to issue long term energy bonds to raise monies with which to pay off the debts owed Ghana’s banking industry by its energy sector state owned enterprises, the bond issuance is now imminent. The bonds are now expected to issued this October.
However, over the coming days, government, acting on the advice of the two transaction advisors and co-arrangers it appointed to handle the issuance – Fidelity Bank and Standard Chartered Bank – will have to sign off on the most crucial issues concerning it.
Indeed, the resolution of those key issues, concerning the volume of the issuance, the offered coupon rate and the security of investors repayment flows, are what has prevented the impending bond issuance from being done earlier, despite strong investor interest both at home and abroad.
To be sure, the bond issuance will be crucial to the fortunes of the Ghanaian economy on two, inter-related levels.
Firstly, the proceeds of the issue will give some 14 banks in Ghana somewhere between GHc7 billion and GHc10 billion in loan repayments which are far behind schedule and therefore classified as non-performing and which therefore have had to be provided against from the lending banks capital and which have eaten deeply into their income, thus denting their profitability significantly. Indeed, the debts owed by energy sector SOEs are the biggest single factor behind the record high non performing loans (NPL) ratio of over 21% which Ghana’s banking industry is currently grappling with, and the bond issuance is expected to lower this significantly, allowing the affected banks to restore their dented capital and return to their usual, enviable levels of profitability.
Secondly, by taking those non performing loans of the books of the energy sector SOEs themselves (the debts would thereafter be classified as performing, securitized debt), it would greatly improve their respective credit ratings, thus enabling them to begin easily securing short term working capital finance and trade financing for their imports again, which would translate into better operational performance and thus better provision of power to consumers.
The sheer importance of the bond issuance is vividly illustrated by the circumstances of one of the two transaction advisors appointed by government to handle the bond issuance – Fidelity Bank. This is the second largest indigenously owned bank in Ghana and even more importantly, one of the most competent banks in the industry as a whole, one which has been at the forefront of financing the country’s downstream oil and gas sector.
Fidelity is one of the banks now owed the most by energy sector SOEs. However, true to its corporate policy of utmost prudence, the bank, in 2016, made full provisions against the potential losses it has been faced with arising from non-performing loans owed it by those SOEs and also by bulk oil distribution companies (BDCs) whose debts to the banks are the result of government’s indebtedness to them and who are also slated to be paid off with the proceeds from the impending energy bond issuance.
But those loan loss provisions, amounting to GHc170.744 million – three times the loan loss impairment charges the bank incurred in the previous year and one and a half times the staff costs the bank incurred for the whole of 2016 – seriously dented Fidelity’s profitability for the year; lowering pre tax profits to GHc18.576 million, the first time it has experienced a fall, rather than a rise in profits in its first decade of existence.
To be sure, Fidelity, with one of the largest shareholders bases in Ghana’s banking industry, at GHc562.972 million as at the middle of 2017 and capital adequacy of 30.08% – three times the prescribed minimum of 10% – at that time, has the financial solidity to take this in its stride, but most of its counterparts do not have such endowment and thus have been taken too close to the financial abyss for comfort by energy sector debts.
But it is instructive that even Fidelity’s circumstances has had dire repercussions for Ghana’s economic fortunes. The bank has been one of the leading players in the financing of Ghana’s energy sector with a market share of about 15%. Between 2010 and 2014 alone the bank financed over US$2.5 billion worth of refined petroleum products such as diesel, gasoline, premix and LPG as well as light crude oil and natural gas.
The bank also leads the involvement of Ghana’s local banking industry in the emergent upstream oil and gas industry, a sector which even the Ghanaian subsidiaries of multinational banks tend to leave to their parent banks with a resultant long line of communications and decision making and inevitable delays in service delivery. But Fidelity has been active in even financing production infrastructure and providing bridging finance.
Inevitably though the large amount of non-performing debt outstanding to Fidelity by SOEs and the BDCs has persuaded it to slow down its lending to the energy sector. It will take repayment of that indebtedness, from the proceeds of the impending energy bonds which it is serving as a transaction advisor and co-arranger for it to resume its usual stronger levels of financing support for the sector.
However, it has emerged that the impending bond issue may not be large enough to pay off all the outstanding debt owed the banks after all. Initially government had intended to issue GHc10 billion worth of energy bonds with a 15 year tenor.
However, it has now been realized that the revenue inflows into the Energy Sector Levies Account (ESLA) from which the bonds are to be serviced and ultimately amortized will not be enough to carry this amount. Therefore government is now looking to scale back the volume to be issued to about GHc6-7 billion, or identify other revenue sources that can enable it carry the debt servicing and amortization obligations arising from a GHc10 billion bond issue.
The snag is that ESLA itself is classified as a Special Purpose Vehicle and so its revenue flows are outside the government’s budget, just as the legacy debt itself is not classified as part of government’s debt. But once extra revenue sources are brought in those convenient classifications will no longer hold and government’s already inordinately high public debt levels would worsen further.
It is instructive that the International Monetary Fund, it is recent fourth review of Ghana’s performance under the ongoing Extended Credit Facility warned about the implications of the impending bond issuance to the country’s debt position. Government on its own part, in appointing Fidelity and Standard Chartered Bank as transaction advisors warned them not to structure the bond issuance in a way that it would become part of the public debt.
Actually, government has another reason for lowering the size of the impending issue. Joseph Cudjoe, Deputy Minister for Energy with responsibility for finance says that government wants to scale back the size of the bond issuance in order to lower the interest rate that investors will insist on pointing out that the bigger the size of the issuance, the riskier it is to investors and consequently the higher the rate they wil demand. This too has pushed government towards issuing the bonds in tranches each one smaller than the original planned one-off issuance.
The other problem government is faced with is that potential investors want firm assurances from government about the regularity of repayments since it does not intend to issue a sovereign guarantee. Investors worry that over the 15 year tenor of the bonds a government could come to office that might decide to re-allocate the revenu7e inflows into ESLA for some other purpose.
Besides this investors also worry about what the political minority may do following the bond issue, pointing to the petition sent to America’s Securities and Exchange Commission alleging insider trading in the controversial US$2.25 billion cedi denominated bond issue done in April this year. These worries are of crucial importance considering that the issuers expect foreign investors to take up some 60% of the bonds to be issued.
Nevertheless, both the transaction advisors and government itself claim that investor interest is strong, both from foreign investors and local institutional investors such as pension funds. Which is why government will go ahead, make its final key decisions, and put its biggest bond issuance to date on the capital market over the next one month.