Fears over early redemption on 15 year bonds heightens

Ghana could be forced into an early redemption of its 7 and 15-years bonds issued in March 2017, as Franklin Templeton, the company that bought about 95 percent of the assets faces financial troubles in India.

The US-based mutual firm which bought Ghana’s bonds at a rate of 19.75percent and at total coupon value of US$2.25 billion but in local currency, is winding up six debt funds that managed over US$3billion in the Asian country after struggling to meet clients’ withdrawal requests. This, according to market watchers, could force Templeton to demand an earlier repayment from Ghana, in order to raise funds for its investors.

Should this happen, it will be an ill omen for Ghana which is already battling a decline in gross national savings, weak current account position and an unfavourable back-end ratio, as well as, considerable slowdown in economic activity due to the Coronavirus pandemic.

“As the panic continues and anxiety heightens among the investor community, Franklin Templeton could be forced to make an early demand for Ghana to redeem its bonds held by the company in other to raise funds for its investors. “If Ghana is pushed to redeem the bond together with the 19.75 percent yield on demand by Franklin Templeton, it could trigger an early financial crisis in the country,” says Dr. Jerry Monfant, an economist and global strategist.

At the time the bond was offered, Ghana’s rating was B stable by Fitch, a rating agency, which was still far below widely accepted AA margin. However, in 2020, the country’s rating has deteriorated to B3 negative according to Moody rating agency, which means that it will be difficult for Ghana to borrow to defray the Templeton debt should the company come asking.

“As Ghana is already debt distress and the economy becoming hopeless, it is my passionate desire that the country’s economic managers give these happenings a closer look,” he added.

Instructively, he believes that the country requires a plan B in the waiting to avoid possible default on early demand of bond redemption initiated by Templeton and also avoid a needless legal tussle.

“Ghana should be on the lookout because I hold a conviction that the issue is not simple and also not limited to the default in payment by infra-project limited, one of the defaulting companies. Templeton risk exposure is very high and they have high non quality assets than quality ones in their portfolio.

“While others may attribute the situation to redemption pressures in the financial system due to the outbreak of COVID-19, I disagree with such position.

And my reason is that investing in low rated bonds for the sake of high interest payment just as in Ghana’s situation can just simply be dangerous,” adds Dr. Monfant, who is also President of MBIC Group.

Questionable terms

Dr. Monfant is questioning why a single firm could secure 95 percent of a sovereign bond. “In a situation of this nature, Ghana is boxed to pay a double rate or call it a double high cost.

One is the exchange rate and the other is the high interest rate. A fragile economy such as ours can easily be crippled by some of these economic decisions and render the country vulnerable to any economic shock.

“In the world of international finance, bonds issued at such a high yield is termed as a junk bond, because, the foundation of the yield is based on how weak an economy is rated. It also confirms our long held conviction about how our economy is struggling.”

He, however, explained that the high coupon rate could have been the result of economic factors such as, poor growth outlook, high debt burden, a weak currency, little ability to collect taxes, and unfavourable demographics which affects a borrower’s ability to pay back its debts and to negotiate lower cost credit.

Franklin Templeton India

The Mutual Fund Company jolted investors in India with the decision to wind up six yields oriented managed credit funds from Friday 22nd May, 2020. The six schemes are: Franklin India Low Duration Fund; Dynamic Accrual Fund; Credit Risk Fund; Short Term Income Plan; Ultra Short Bond Fund; and Income Opportunities Fund.

Together, these constitute about 25 percent of assets under management of Templeton.

With the current troubles confronting the firm, it essentially means that it will first have to liquidate the assets in the schemes and then refund the money to the investors who placed their funds in any of the mentioned schemes.

However, with the market being so sluggish and tough, investors may not get their money as early as expected, because it will be difficult to get a buyer for low-rated assets in the portfolio, so investors may have to wait longer.

Investors will also have to pay a hefty price for inappropriate investments of their funds by Franklin Templeton.

According to Dr. Monfant, the mutual fund firm has an appetite for investing in credit risk funds. Just like its investments in Ghana which is classified as a low-rated bond.

“Credit Risk funds are debt funds that plays on the principles of high-risk –high-reward. By definition, credit funds invest 65percent of the portfolio in bonds that are AA rated or below. In Ghana, our rating was B stable by Fitch, a rating agency, which was still far below AA,” he said.