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Various governments in Ghana so far since 2007 have been romanticizing with the issuance of bonds as alternative means of raising funds to meet developmental needs and or to retire otherwise more expensive loans in order to restructure the national debt portfolio of the country.
Even though these bonds issuances over the years have provided some respite for the economy and some relief for the managers of the economy at the time of issue, they are often characterized by controversies, allegations and counter allegations by the political ruling class.
A recent bond issue by the current President Nana Akufo-Addo administration under the supervision of the current Finance Minister, Ken Ofori Atta, has been caught up in a similar web where allegations of insider trading and accusations of conflict of interest have been raised.
The purpose of this article is to give some insights into the factors that led to the issuance of the bond by the Finance Minister, the issues that have characterized the process and the concerns raised by the Minority in parliament, as well as some industry players. We will also share some information about what bonds are and why bonds are issued.
Indeed, bond issuance is an important way of diversifying a company’s or a country’s debt portfolio in raising long term loans under more favorable conditions as compared to other forms of raising capital such as borrowing from the banks. We would be discussing the pros and cons of other options in this article as well.
Despite its advantages of funding infrastructure, benchmarking and restructuring debt, sovereign bonds add up to the country’s public debt which has reached unsustainable levels.
The country’s romance with bond issuance began with the President Kufuor led NPP administration close to the end of his tenure in office in 2007 where the then government tapped into the Eurobond market for the first time to raise an amount of 750 Million Dollars ostensibly for the purposes of improving the infrastructural needs of the country. It was a 10 year bond which was scheduled to mature in this year, 2017.
The succeeding governments of the Mills and Mahama led NDC administrations also continued with the Eurobond issuance strategy since the first issue was deemed to be a success. And perhaps because it had been perceived as a more sustainable way of raising long term funds for government projects having been ushered into a middle income economy where concessionary interest rate loans were no longer so readily available as they used to be. The erstwhile Mahama government issued its final bond before leaving office as late as November 2016.
The 2017 Bond saga
The current Finance Minister, Ken Ofori Atta, of the President Nana Akufo-Addo administration, has continued with the practice that has almost become a tradition for the Finance Ministers of these successive governments. So far the value of the bonds issued under the belt of the current Finance Minister is 10 billion Cedis but it is estimated that at least another 30 billion Cedis worth of bonds are in the offing to be issued before the end of the year. Including the energy bond which has already been announced by officials of the government.
The controversial bond issue of 2.25 Billion Dollars comprising four bonds representing the largest amount issued by a sub-Saharan African country in a day, has been embroiled in some controversies that are yet to be resolved even though the government has denied any wrong doing.
Substantial investments in the bonds came from respected global financial investors Franklin Templeton led by acclaimed investment guru Michael Hasenstab who has a track record of investing in countries that other investors largely ignore in deals that are seen as unsafe bets but that end up paying off.
Having invested in countries like Ukraine, Mexico, Iran and Argentina previously in economically turbulent times. Templeton has held Ghana’s debt for over ten years and already has about 2 billion dollars in domestic and sovereign bonds.
Ministry of Financeupdates on issuance of bond
Information by the ministry responsible for finance indicated that the Government of Ghana issued four sovereign bonds, raising a total of US$ 2.25 billion. The four bonds issued on April 3, 2017, will be used partly to repurchase a portion of the existing higher coupon short-term public debt instruments.
The issuances comprise 15 and 7 year bonds with a coupon rate of 19.75% respectively, which raised Cedi equivalent of US$ 1.13 billion, and the re-opening of existing 5 and 10 year bond issues, with coupons of 18.75% and 19% respectively, raising a Cedi equivalent of US$ 1.12 billion. The bonds were largely subscribed by offshore buyers. These bonds have so far been rated the largest single-day sovereign transaction in the entire Sub Saharan region.
According to the Finance ministry, this sovereign bond will boost the country’s central bank reserves, thereby strengthening the Cedi’s performance against its major trading currencies. Industry players believe these issuances will go a long way in stabilizing the Cedi.
The Ministry indicated that this move is in line with the country’s debt management strategy and will address the issue of high domestic interest rates, short tenor of the existing bonds and short term rollover pressures.
The Minority’s position
However in May, the Minority in Parliament called for a full-scale parliamentary inquiry into the recent $2.25 billion bond issued by the NPP government.
According to them the transaction lacked transparency and had the potential of adversely affecting the welfare of the people of Ghana.
Mr Cassel AtoForson, the Minority Spokesperson on Finance made the call at a press conference organized by the group in reaction to Vice President Dr Mahamudu Bawumia’s assessment of President Nana Akufo-Addo’s first hundred days in office.
According to him, the NPP in 2015 criticized the NDC heavily for borrowing $1 billion Eurobond at a coupon rate of 10.75 per cent for 15 years (with World Bank Guarantee) to replace a portion of the 2007 Sovereign bond and some domestic bonds.
He said the minority had also pointed that the bond issue was clearly an international business transaction within the meaning of article 181 (5) of the Constitution and therefore expected that bond issuance would have been brought to Parliament for approval.
Mr Forson also stated that potential conflict of interest situation had arisen as a result of the relationship between Ken Ofori-Atta, the Finance Minister, whose wife is a Director of Enterprise Insurance and Trevor G. Trefgame, a Board Director of Franklyn Templeton Limited and Chairman of Enterprise Group Limited.
He said the Franklyn Templeton Investment Limited recently participated in the purchase of almost 95 per cent of the Government Domestic Bond, which the minority suspected was issued to favor Ofori Atta’s business partners.
He stated that the whole bond transaction was shrouded in secrecy to the extent that Ghanaian investors were denied the opportunity to participate in the deal. The bond was virtually participated by only two investors.
Mr Forson further questioned why a single investor, Franklyn Templeton, which is a non-resident investor that patronized both Domestic and Sovereign Bonds in the past, was allowed to purchase almost 95 per cent of the latest Government Domestic Bond. The size of this virtual “private placement” made it akin to a sovereign bond or foreign loan.
He stated that Government Domestic Bond had a “Hybrid” (cedi/foreign) feature and therefore when non-resident investors bring in foreign currency at the time of purchase, they hold the equivalent cedi bond in the same implicit foreign currency.
He stated that in the past the “book building” approach for issuance of bonds the process was opened for a minimum of three days to ensure optional participation.
“However, in the case of the $2.25 billion bond issue, the process was limited to one day, denying other market players the opportunity to participate in the process.”
The Half-Hour Motion
On the 31st of May this year, the Minority Leader, Haruna Iddrisu, filed a half-Hour Motion in parliament on the 2.25 billion Dollars controversial bond, which sought to compel the Finance Minister to make available to parliament “the full complement of documentation related to the issuance, the participants, the utilization of proceeds and the currency in which the bond was settled.”
Though the Finance Minister appeared before the House on the 7th of June this year to respond to the Half-Hour motion, it appears that the Minister was unable to satisfy the demands and suspicions of the minority group in parliament.
The Minority Leader, related at a recent press conference on the bond issue that the Finance Minister has failed to disclose the participants in the bidding process during the course of bidding for the bonds as requested through the Half-Hour motion.
He said, “The Minister was required to furnish the House with the participants of this controversial bond. The Minister declined to heed this simple and harmless call with a rather dishonest and unacceptable response. He said that information on the participants of the bond was market-sensitive, and hence could not be made available in the public domain.”
He also raised issues of contradictions and inconsistencies in the figures recorded in the order books while re-emphasizing the minority’s suspicion of a possible collusion.
“It is intriguing that all the financial institutions that basically appeared to be intermediaries for the major bidder, Franklin Templeton, offered the same rate of 19.75%. This does suggest a possible collusion among the participants to prevent keen, healthy and beneficial competition and hence artificially fix the rate. Another clear evidence of prior knowledge and insider trading in this whole transaction,” he observed.
Minority’s chain petitions
Based on its dissatisfaction, the minority group resorted to the use of the conflict of interest jurisdiction of the Commission on Human Right and Administrative Justice (CHRAJ) where the Ashanti Regional Youth Organizer of the NDC, Brogya Gyemfi petitioned the CHRAJ to look into the conflict of interest allegation against the Finance Minister.
But before the Commission could finish its investigations on the matter, the Minority exercised its option to file a petition with the US Security and Exchange Commission (SEC) to investigate if ethical boundaries have been crossed by Franklyn Templeton.
While that is still ongoing, it has once again extended its petition to the Commission de Surveillance de Secteur Financier (CSSF) of Luxembourg to look into the matter. According to the Minority, its latest move has been influenced by its investigation which revealed that Franklin Templeton used a subsidiary company registered in that European country to buy the majority share of the bond which is now in contention.
Finance Minister’s Defense
The Finance Minister, Ken Ofori Atta has also given government’s position on the recent bond issued and has defended the competitive nature of the bond by describing it as a mark of renewed investor confidence in the country’s economy.
According to Mr. Ofori-Atta the government had pulled off a deal hailed by the financial markets worldwide as impressive.
“We have heard comments about the rates we got and a comparison with the last sovereign bond that we did, which had a guarantee from the World Bank. I think it was 10.75% that was a dollar bond and we raised a billion so we are talking about dollars when we talk about 10.75% and this one(the latest bond issue) is really a domestic bond that we are referring to. Therefore there will be differences in interest rates and differences in risks because you have both the inflation factor and you have a currency issue that you have to deal with but the beauty of what we did was that we also had a call option on that which means that in future as interest rates come down after five years we can call on these things. I think the market really hailed it and we are going to Washington a lot more confident than before because the Breton woods institutions know that the market response to what we are doing is good.” he said.
A FirstBanc Financial Services position
The Ministry of Finance, through the book building process, recently issued 7- and 15-year bonds at a coupon rate of 19.75%.
The bonds were oversubscribed with international investment firm Franklin Templeton buying a significant portion of the bonds issued.
In the aftermath of this bond transaction, Ghanaians have raised conflict of interest concerns regarding the Finance Minister, Ken Ofori Atta.
These issues have bothered on the participation of Franklin Templeton, the pricing of the bond and the manner in which the funds were raised.
We would like to evaluate the issues at hand, with particular consideration to historical antecedents and our current economic and legal circumstances.
Franklin Templeton is a global investment management firm headquartered in the US. Concerns have been raised about the firm’s connection with Trevor Trefgarne, who currently chairs the Enterprise Group (GSE: EGL), a listed Ghanaian company involved in the insurance business.
Trevor Trefgarne is also a non-executive Director of Franklin Templeton Investment Funds. Enterprise Group Limited is partly owned by the Databank Group through Ventures and Acquisitions Limited which holds a 35.89% stake in EGL.
The Databank Group was founded by Ken Ofori Atta, the current Finance Minister. Mr. Ofori Atta has also sat on the board of EGL in the past, pointing to a connection between him and Mr. Trefgarne, and possibly Franklin Templeton Investments.
Despite the possible conflict of interest issues that may be raised, Franklin Templeton have historically participated in Ghana’s bond issuances. In fact, Franklin Templeton took part in Ghana’s 2013 Eurobond, as reported by Reuters in July 2013.
Earlier that same year, the firm also reported at the end of March that its exposure to dollar-denominated Ghanaian bonds had contributed positively to the performance of its emerging market bond portfolio in the first quarter of 2013.
This implies that Franklin Templeton already held Ghanaian bonds even before the 2013 Eurobond issue, most likely the 2007 issue which marked Ghana’s debut into the global Eurobond market.
As a result, its participation in the latest issue is not a novelty and should not be misconstrued as such. Franklin Templeton, according to the Ministry of Finance, has held Government of Ghana bonds of up to USD2bn before this transaction. In reality, the particular fund manager with the firm who purchased Ghana’s bonds, Michael Hasenstab, is a well-respected global bond trader whose fund is ranked number one in its category over a 10-year period by Morningstar Research.
His investments have mainly been directed at high yield bonds from distressed economies that have eventually turned around, pointing to confidence in Ghana’s ability to turn around our current macroeconomic situation for the better.
The yields on both bonds that have come into contention, stood at 19.75%.
There have been concerns raised about the pricing of the bond, and whether it sought to favor the buyers over the interest of Ghana.
It is noteworthy to remember that Ghana’s first 10-year bond, which was issued in November 2016, was sold at a yield of 19%.
Since investors almost always demand a maturity premium for longer-term debt, it is reasonable to expect that bonds issued at a longer maturity than last year’s 10-year would require a higher yield; thus, the 19.75% on the 15-year is appropriate, although one could not say the same for the 7-year.
In addition, the comparison to 2016’s 10-year dollar bond is unfortunate, since yields on bonds denominated in different currencies are not directly comparable.
Concerns have also been raised over the foreign firm’s participation, including an allegation by the minority in parliament that it effectively means the bond cannot be classified as a domestic issue.
However, bonds with a maturity of 2 years and above are indeed open to foreign investors. In addition, such bonds do not need parliamentary approval prior to issue, although Eurobonds do because they are denominated in foreign currency.
As such the bond issuances, which were denominated in Ghana Cedis, are domestic bonds despite foreign investor participation.
Although the significant proportion of the bonds taken up by foreign investors may expose the nation’s economy to exchange rate pressures when those investors decide to sell off and repatriate their holdings, these concerns are economic in nature, and do not represent a contravention of Ghana’s statutes.
There are however, some questions in relation to this bond issuance that begs for answers.
Under the book building process, the book-runners (Barclays Bank, Stanbic Bank and Strategic African Securities) have previously organized investor presentations and gauged investor expectations on return at least 3 days before the issue date of the bond.
For a transaction of this size (GH¢4.8bn), the Ministry of Finance and the book-runners could have engaged and courted the interest of institutional investors like pension funds, partly in order to establish market-based initial pricing guidelines.
Going forward, the Ministry of Finance and the book-runners must ensure that market sentiments are reflected in the pricing of bonds by allowing all interested investors ample time to make bids for its debt securities.
What you need to know about bonds
Bonds sold by a corporation or government agency at a particular time and identifiable by date of maturity
A certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money; the issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal
Why bonds are issued
When government agencies or companies need to raise money, issuing bonds is one way to do it. A bond functions like a loan between an investor and a corporation. The investor agrees to give the corporation a specific amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. When the loan reaches its maturity date, the investor’s loan is repaid.
The decision to issue bonds instead of selecting other methods of raising money can be driven by many factors. Comparing the features and benefits of bonds versus other common methods of raising cash provides some insight into why companies often look to bond issuance when they need to raise cash to fund corporate activities.
Bonds Versus Banks
The interest rate companies pay bond investors is often less than the interest rate they would be required to pay to obtain a bank loan. Since the money paid out in interest detracts from corporate profits, and companies are in business to generate profits, minimizing the interest amount that must be paid to borrow money is an important consideration.
Issuing bonds also gives companies significantly greater freedom to operate as they see fit – free from the restrictions that are often attached to bank loans.
Bonds Versus Stock
With bonds, companies that need to raise money can continue to issue new bonds as long as they can find investors willing to act as lenders. The issuance of new bonds has no effect on ownership of the company or how the company is operated. Stock issuance, on the other hand, puts additional stock shares in circulation, which means that future earnings must be shared among a larger pool of investors. This can result in a decrease in earnings per share (EPS), putting less money in owners’ pockets.
More About Bonds
Bond issuance enables corporations to attract a large number of lenders in an efficient manner. Record keeping is simple, because all bondholders get the exact same deal with the same interest rate and maturity date. Companies also benefit from flexibility in the significant variety of bond offerings available to them.
The basic features of a bond
Credit quality and duration – are the principal determinants of a bond’s interest rate. In the bond duration department, companies that need short-term funding can issue bonds that mature in a short time period. Companies that need long-term funding can stretch their loans to 10, 30, and 100 years or even more. So-called perpetual bonds have no maturity date, but rather pay interest forever.
Credit quality stems from a combination of the issuing company’s fiscal health and the length of the loan. Better health and short duration generally enable companies to pay less in interest. The reverse is also true, with less fiscally healthy companies and those issuing longer-term debt generally being forced to pay higher interest rates to entice investors into lending money.
Types of Bond Options
One of the more interesting options companies have is whether to offer bonds backed by assets. Bonds that give investors the right to lay claim to the company’s underlying assets, in the event the company is unable to make its promised interest payments or repay its loan, are known as “collateralized” debt.
Callable bonds are another option. They function like other bonds with the caveat that the issuer can choose to pay them off before the official maturity date.
Convertible bonds are also a consideration. This type of bond starts off acting just like other bonds, but offers investors the opportunity to convert their holdings into a predetermined number of stock shares. In a perfect scenario, such conversions enable investors to benefit from rising stock prices and give companies a loan they don’t have to repay.
Source: Clement Akoloh