When a company, a syndicate, a government, or any entity needs to borrow money, to, let’s say, keep the business running, to embark on new projects, to pay back old loans, for aggressive expansion, or for whatever reason, they may issue out what is called “bonds” to interested parties.
Quite simply, a Bond successfully issued is a Loan accepted. The borrower is the issuer of the bond and the bond will contain the terms of the loan e.g. the interest rate (or coupon rate), how the interest payments (or coupons) will be made, the time at which the full amount has to be paid to the investor (maturity date), etc. That is a bond.
What is a Eurobond?
The Eurobond only means the issuer isn’t in the same country or trading in the local currency of the investor/lender. A Eurobond doesn’t have to be about Europe or the Euro. It just points to the international aspect of the bond and the involvement of foreign currency.
As Ghanaians, our most recent Eurobonds have meant that the loans to our government will be in a foreign currency, specifically, dollars. This should explain why the government is always confident of the arrest of any fall of the Ghana Cedi against the US Dollar when a Eurobond is near. Eurobonds that the government has been issuing means dollars are coming into the system, thereby reducing the scarcity and the accompanying demand for the dollar.
The Eurobond, also known as external bonds, is issued in one country and sold in a different one. Bonds are grouped by the currency in which they are denominated. For example, bonds issued in US dollars are known as Eurodollars.
How Eurobonds Work.
Anyone in need of foreign-denominated borrowings for a specified time can offer Eurobonds at fixed interest rates. Private organizations, international syndicates, and the government can offer them. The buyers or investors of these Eurobonds are generally large companies, banks, or financial institutions. The interest is calculated annually, and the principal amounts paid at the maturity date.
Ghana offered her first Eurobond in 2007 to the tune of $750 million, asking investors to lend that amount with the promise of paying it back in 10 years with interest. Bonds were issued through the Bank of Ghana, while the government received the cash amount in the form of a loan.
The general popularity of Eurobonds is because of its ability to be a financing tool. They offer a high degree of flexibility. For governments, it’s usually an immediate, long-term finance option. An investor considers several factors when looking at which country to target for Eurobonds, e.g. favourable interest rates, a stable market, local regulations, or the presence of likely investors. These can all play a role in the decision.
Ghana’s Eurobonds, present and past.
Earlier this year, Ghana issued a $3 billion Eurobond. It just means we accepted a $3billion loan from outside. The Finance Minister, Ken Ofori-Atta, indicated in the 2019 Budget Statement last year that the government had the intention to do this. What is really worthy of mention is that when we asked for $3 billion, we got offered an impressive $21 billion and we still only accepted $3 billion. The extra offers made room for lower rates and better terms of engagement, as will any bargaining scenario when the demand for what you offer is high.
Also, note that we issued not one but three bonds with three different maturity periods (payback times). So we’re going to pay back the $3billion in instalments, with each payment instalment having its own terms and conditions.
Ghana’s Finance Minister, while presenting the mid-year budget statement in Parliament last month, said, “As you may recall, the government obtained the approval of this August House in December last year to raise up to US$3.0 billion to finance growth-oriented expenditures in the 2020 budget (including restructuring the energy sector) and also to conduct liability management operations”.
“Based on the approval, Ghana became the first-ever country on the African continent to issue a 41-year bond and a second tri-tranche bond in the history of the country”, he added.
He further explained that “Ghana successfully raised US$3 billion in the international capital markets in three tranches of 6-year, 14-year and 41-year Eurobonds of US$1.25 billion, U$1.0 billion and US$750.00 million, respectively on 4th February 2020”.
“The 6-year, 14-year, and 41-year bonds were priced at 6.375 percent, 7.875 percent and 8.750 percent, respectively. Mr Speaker, this transaction was a landmark achievement in many respects as the bond came with the lowest-ever coupon rate for Ghana and first 41-year bond tenure in Africa”, Mr Ofori-Atta reported to the House.
And The IMF Cautions Us.
Though we’ve professed to have broken up with the IMF, they seem to still slide in our DM’s with a message or two every now and then. A bond issued is a loan. The IMF cautions that, with all these monies coming in, we would have to pay it all back sometime. So if we don’t invest it well to generate growth and repayment capacity, then there will be a debt crisis on our hands later on. I have always stated that mismanagement is the biggest issue our continent faces.
You should understand why our government is quick to throw in Ghana’s increasing GDP figures and indications that Ghana is working for Ghanaians. That’s because it’s an easily spotted marker for if the country is productive.
Of late the World watches Ghana. The macroeconomic data validated by the international community has, for a while now, pointed to a promising future for Ghana. While the global bond markets secretly scrutinised Ghana last year and those before that, Ghana got rebranded as “Beyond Aid”, planned for $3billion in Eurobonds and impressively got offered seven times that ($21million). That’s like leaving your spouse and suddenly getting 21 messages from other suitors the next day after announcing the breakup, but you expected about just 3 IM’s. That means you’re hot! Ghana has been looking very hot and the IMF is saying we face a debt vulnerability risk if the proceeds of these bonds are not managed properly.
Nonetheless, this increased scrutiny and attention by the international community and foreign investors have the power to strengthen macroeconomic discipline and move transparency and structural reforms forward. Because the people in whose praise we bask are watching us keenly. If we intend to court them further, then Ghana must manage her affairs properly. Introducing poor economic policies will come at a price if investors do not feel comfortable with our long-term macroeconomic strategies. If foreign investors and the international community are not happy, they will look away to find greener pastures.
The Benefits of the Eurobond.
In 2018, Mr Ken Ofori, the Minister for Finance, revealed to lawmakers in parliament that GH¢30 billion is needed to bridge the infrastructure gap. This is one of the many cracks in our economic structure that needs patching up and that will require big money. These problems existed way before 4 years ago.
The economic ambition of the nation is high. There are bold initiatives that need financing to be actualised.
Borrowing from overseas is good for the economy as opposed to borrowing domestically. If the government borrows domestically, the competition for funds will drive up the interest rate. Because issued Eurobonds bring in the money from elsewhere, the extra supply of cash into the economy has the potential to reduce lending rates by the banks and to facilitate productive sectors of the economy.
Ghana in the recent past announced her intention to reduce our dependence on international aid. Previously, we took money from the IMF, The World Bank, International Aid, or concessional loans from friendly countries. Many times the conditions attached to these loans limit us from operating independently. On the other hand, Eurobonds tend to come with few conditions. This allows the government the freedom to utilise the funds as they see best.
Eurobond terms are generally favourable. So, the government can rob the proverbial Peter to pay Paul when Paul’s terms are worse than Peter’s. Eurobonds with low-interest rates and longer maturity periods can pay for old loans that had higher interest rates and/or shorter maturity periods. This can increase the country’s credit rating, as we have seen happen over the past few years.
While global interest rates are unpredictable, getting a long-term low-interest loan can be a good thing. And as stated earlier, the inflow of foreign currency can stabilise the Ghana cedi by reducing the scarcity of foreign currency in the markets.
Corporate entities like Guaranty Trust Bank in Nigeria and Vodafone Ghana have successfully issued Eurobonds. It’s nothing new. Ecobank Transnational Incorporated, the parent company of the Ecobank Group, last year announced its first-ever successfully issued Eurobond of $450 million. It’s nothing too confusing. It is seemingly a good alternative if managed properly. While some investors find it risky to invest in Africa, take solace in the fact that our Eurobond was seven times oversubscribed. Our demand was met seven times over.
Nonetheless, proper management is key to the success of these Eurobond endeavours, as with any financial situation.
I hope this helps in your understanding of Eurobonds.