Ghana’s $3 bn Eurobond over subscribed amidst Covid-19 pandemic

The government of Ghana has made a successful debut into the International Debt Capital Markets securing $3 billion from an oversubscribed bond book value of $6 billion.

With this, Ghana becomes the first Sub Saharan African Sovereign to issue a Eurobond in USD since the onset of the Covid-19 pandemic.

The proceeds will support the budget deficit by funding growth-oriented expenditures; and conduct liability management on both external and domestic bonds.

Government in the 2021 budget announced its intention of executing a programme aimed at raising up to $5 billion through Eurobond, Diaspora bond, Sustainable bond and Syndicated loans. This 2021 Eurobond is thus one of the four vehicles government intends to use to raise the up to $5 billion.

With this Eurobond issuance government has the chance of either going back to the market to raise additional Eurobond or explore the three other options, in case it intends to secure more funds from the International Debt Capital Markets.

Ghana successfully raised US$2 Billion in 2018, US$3 Billion in 2019 and US$3 Billion in 2020. The 2021 bond issuance comes after a series of fixed-income virtual meetings held locally across three (3) days with Investors from the United States, United Kingdom, Europe, Middle East and Asia.

The transaction comprised four tranches – US$ 525 million 4-Year Zero Coupon, US$1 billion 7-year Weighted Average Life (WAL) priced at 7.75%, US$1 billion 12-year WAL at 8.625% and US$500 million 20-year WAL with a coupon of 8.875%.

The successful issuance of the 2021 Eurobond is testament to investors renewed confidence in the Ghanaian economy and its managers.

Despite the looming risk of a possible third wave of COVID-19 infections across Europe, generally more volatile market conditions and global trade disruption from the Suez Canal, Ghana has seen strong demand for its sovereign bond offering which was oversubscribed at over $USD 6 Billion.

Ghana’s consistent ability to raise multi-billion-dollar financing and pioneering use of a 4 Year Zero tranche are a testament to Ghana’s hard-won credibility with investors, strong growth prospects and disciplined fiscal consolidation efforts in 2020.

The Zero Coupon Bond

Ghana is the only first emerging market sovereign to add a zero-coupon bullet tranche to its bond financing mix, enabling it to create fiscal space to build back better.

Ghana’s debut 4-year zero-coupon bond was oversubscribed by 2X, despite being the first of its kind to be issued by a West African sovereign, further demonstrating investors continued support for Ghana’s transformation story and strong fiscal consolidation efforts.

Zero coupon bonds are bonds issued without any interest but trade at discount. Thus, unlike other coupon bearing bonds, Ghana will not pay any interest on the four-year zero coupon. The only debt obligation that the government of Ghana would have to honour will be the face value of $525 million on maturity.

According to government, the four (4) year zero coupon bond is an innovative market-oriented solution to address post-Covid-19 challenges and improve the cash flow required for debt servicing. Part of the proceeds shall be used to refinance more expensive domestic debt [the average interest rate of circa 19%].

The practical mechanics of a zero-coupon bond

Assuming Ghana issues a $500 million zero-coupon bond at a discounted rate of 20% ($100 million) Ghana will receive $400 million in cash today but pay back $500 million when the bond matures in 4 years.

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In the interim however, Ghana will not pay any interest over the 4 years. This means government can use the money it would have used to pay interest over the next 4 years for something else. In the case for Ghana for this bond, government has indicated the intention of using the proceeds to refinance more expensive domestic debt attracting 19% interest.

So Ghana is borrowing at no interest and using the proceeds to pay existing debt with higher/expensive interest rates.

How does this benefit Ghana? Ghana’s existing domestic bonds attract an average interest rate of about 19% (make it 20% for ease of analysis). So here, Ghana issues a 20% discounted zero-coupon bond at $500 million and receives $400 million. If the $400 million is converted to Cedis at say a cedi-dollar exchange rate of 6, that is some GHc2.4 billion.

This can be used to retire domestic bonds attracting the interest of 20%. This will save Ghana GHc480 million Cedis in interest savings a year {that is 20% multiplied by GHc2.4 billion).

Multiplying the GHc480 million a year by 4 years gives GHc1.92 billion (equivalent of $320 million) in savings over the 4 years. So now if we deduct the $100 million we pre-paid upfront on the zero coupon from the $320 million we get our net savings that comes to $220 million dollars in savings over the four years.

Ghana was projected to maintain positive economic growth of 0.9% in 2020, representing one of the few “pockets of resilience” on the continent and largely reflective of the exemplary leadership of the Nana Addo Dankwa Akufo-Addo led Government in handling the pandemic.

The Government of Ghana expects to record average GDP growth of 5% over the medium term and has committed to implementing comprehensive measures including: the introduction of e-taxation to increase domestic resource mobilization; the deployment of digital platforms to engage local communities in the oversight of public spending; and efforts to strengthen tax administration systems to identify, track and stem illicit financial flows (IFFs)