Cocoa notes compete with T-bills for investors’ money - Report

The Ghana Cocoa Board’s new cocoa notes have emerged as a fresh rival to government Treasury bills for the cash of the country’s banks, pension funds and insurers, as both borrowers draw on the same limited pool of domestic savings.

Cocoa Capital PLC, COCOBOD’s financing vehicle, has offered 266-day commercial paper at 11 per cent, more than a percentage point above the 9.71 per cent the government paid on its 364-day Treasury bill at last week’s auction. For investors weighing where to place money for roughly a year, the two instruments are close alternatives.

Market analysts made the comparison explicit before the cocoa notes were launched. In an analysis published in late September, they benchmarked the commercial paper against the 364-day bill, arguing that Cocoa Capital would need to “pay enough of a premium to make investors indifferent between cocoa-backed securities and safer sovereign paper.” They noted that domestic liquidity, though substantial, was constrained by “competing sovereign, bank, money-market and fixed-income options.”

Auction data from the Bank of Ghana shows that demand for the government’s one-year bill fell to its weakest levels just as the cocoa notes came to market.

Investors bid GH¢1.21 billion for the 364-day bill on September 18. In the auctions of October 2 and October 9, around the time the first cocoa tranche was sold and settled, bids fell to about GH¢475 million and GH¢469 million, respectively. Total Treasury bill bids on October 2 dropped to about GH¢2.93 billion.

Demand has since picked up. At last Friday’s auction, two days after the cocoa notes were listed on the Ghana Stock Exchange, bids for the 364-day bill rose to GH¢1.12 billion.

The figures do not prove that money moved directly from one market to the other. Demand for the one-year bill had already been falling for months as yields dropped, from about GH¢8.1 billion in a single week in late July, when the bill was paying close to 13 per cent. It is also not known which institutions bought the cocoa notes.

But the timing points to a new competitive dynamic in Ghana’s domestic debt market, one that is likely to intensify as COCOBOD returns for more money.

Last Friday’s auction offered a further sign. Some investors bid as much as 11.89 per cent for the 364-day bill, above the 11 per cent on offer from the cocoa notes. The government refused to pay up, accepting no bids above a discount rate of about 8.93 per cent and taking only GH¢588 million, or 52 per cent, of what was offered for the one-year bill. Across all three bills, it turned down almost GH¢1.7 billion in bids and fell about GH¢1.5 billion short of its GH¢5.02 billion target.

The cocoa notes have faced their own test of appetite. Cocoa Capital received bids of about GH¢3.586 billion from 38 institutional investors for its first tranche, short of the GH¢4 billion it was seeking, and accepted GH¢3.396 billion.

Pricing may explain part of the shortfall. The 11 per cent yield sat at the top of COCOBOD’s own guidance range of 10.5 to 11 per cent, but at the bottom of the 11 to 12.5 per cent range analysts had expected, with most forecasting 11.5 to 12 per cent.

The competition is set to grow. Cocoa Capital plans two more commercial paper tranches, of GH¢4 billion and GH¢6 billion, under its GH¢16.3 billion programme, as well as GH¢2.3 billion in bonds of up to five years, which analysts expect to price at between 13.5 and 15 per cent. COCOBOD’s deputy chief executive, Ato Boateng, has said the board could return to the market about two weeks after its first issue.

The government, meanwhile, is seeking GH¢3.8 billion at its next Treasury bill auction.

For investors, the rivalry is welcome. With the 91-day Treasury bill yielding about 4.62 per cent, below September’s inflation of 5.2 per cent, the cocoa notes offer one of the few safe-looking ways to earn a real return in cedis.

The government has made clear it is unwilling to pay more to keep its borrowing costs down ahead of the 2027 Budget. COCOBOD, which needs cash to buy this season’s crop after its offshore syndicated loan collapsed in the 2023/24 season, has less room to hold out.

If investors increasingly use the cocoa notes as a benchmark, the Treasury may find it harder to sell longer-dated bills at current rates. If COCOBOD is forced to raise its own rates to fill the next tranches, the cost of funding the cocoa crop will rise, leaving less room to improve the price paid to farmers.

Analysts noted ahead of the launch that investors “have money available, but are increasingly unwilling to accept ever-lower yields.”

How the next cocoa tranches price, and how much demand they draw, will show whether Ghana’s domestic market is deep enough to fund both the government and its biggest export crop at the rates each wants to pay.