GHC1.92 billion GAT bonds go up on sale

Ghana Amalgamated Trust, the special purpose vehicle established by the Ministry of Finance to raise equity capital for the recapitalization of five indigenously owned banks aims to issue bonds to the tune of GHc1.92 billion to private investors over the next few weeks, the proceeds of which the Trust will use for the recapitalization.

The first tranche of the bonds, worth GHc780 million, will be issued before the end of this month and the proceeds will be used to recapitalize four of the five banks. These are: Agricultural Development Bank which will get GHc127 million, Prudential Bank which is to get GHc251 million, the merged Omni Bank and BSIC (Sahel Sahara Bank) which is to get GHc130 million; and Universal Merchant Bank which is to receive GHc247 million.

The second tranche of the bonds, worth GHc1.14 billion will be issued shortly after, possibly within days of the first tranche. The second tranche aims to recapitalize National Investment Bank – which currently has a capital deficit of over GHc700million – to the new GHc400 million minimum capital requirement.

GAT’s managing director, Eric Otoo admits that the trust is operating on a tight schedule imposed on it by the Bank of Ghana which insists that all five banks must have been recapitalized by the end of March, which means both issuances must have been successfully completed by that time if the beneficiary banks are not to lose their operating licenses.

Bonds issued through both tranches will have tenors of five years and each will have coupon interest rates of 21 percent. However they have bee designed as zero coupon bonds which means all interest will be accumulated and paid as a lump sum along with the principal at the end of the bonds tenor. This, explains Otoo is to align the bonds with the needs of pension funds and life insurance firms – two of the typical kinds of institutional investors being sought – whose liabilities are mainly long term and so who require long term assets to match; although in actual fact this is a way of ensuring that the banks can use all their new equity capital for the next five years.

Where the two tranches will differ however is in the degree of backing to be provided by government itself. GAT is currently in the process of securing a government guarantee of 70 percent of the value of bonds to be issued as the first tranche; but it is seeking to secure a 100 percent government guarantee for the second tranche since the investment into NIB is clearly much riskier, both because of the volume of the investment and the financial circumstances of the bank, as compared with the other four beneficiary banks. While these guarantees have not yet been secured, GAT’s Chairman, Albert Essien assures that they will be provided, once the requisite approval processes are completed.

Subscription to the bonds will be open to all types of investor, foreign and local, institutional and individual, although the structure of the bonds will appeal primarily to major institutional investors, particularly pension funds and life insurance firms who typically invest long term. The pricing of the bonds at 21 percent matches the offered rate on government’s most recent six year treasury bond issue done a few weeks ago and this makes the GAT bonds competitive with regards to pricing.

The investment risk however is considerable; with all interest accruing being piled up to maturity, this means that investors are being asked to bet that GAT can effectively pay double the face value of the bonds five years from now, by selling the shares it will acquire in the banks to interested parties.

This is why the government guarantees will be crucial in providing comfort to investors in the impending bonds, since they mean that investors in the first tranche are assured of 70 percent of their investment no matter how well the four beneficiary banks do over the next five years; and investors in the second tranche – the relatively high risk NIB – will be assured of their entire investments.

However GAT itself is contracting banking and finance experts to improve the quality of the beneficiary banks operations over the five year tenor of the bonds in an effort to ensure that they deliver the requisite financial performance to make their respective market values high enough to attract purchase prices that will pay off the GAT bond without recourse to government’s guarantees.