Guide to the 19.5% debt Ghana can't get yield hunters to buy

Ghana is having a hard time selling $820 million of local-currency debt. They aren’t sovereign notes, which is part of the problem.

The second-biggest economy in West Africa attracted just a quarter of the 3.6 billion cedis of 10-year bonds up for sale last week at about 19.5 percent.

Investors were willing to take on 2.4 billion cedis of seven-year notes paying just half a percentage point lower. The government has extended the offer period to the end of this week, at the same terms.

Finding buyers for the debt is critical for Ghana, which plans to use proceeds from the so-called energy bonds to help electric utilities pay back bank loans. While a global backdrop of suppressed interest rates should favor high-yielding notes such as these, the country set up a special purpose vehicle to sell the bonds in an effort to avoid increasing public debt levels and comply with an International Monetary Fund aid agreement.

That means they aren’t backed by the sovereign even though they’ll be paid back with energy sector levies, which isn’t sitting well with potential overseas buyers.

“It will be a surprise if they get up to the demand the government is expecting from foreign investors,” said Stuart Culverhouse, the London-based head of sovereign and fixed-income research at Exotix Capital, which specializes in frontier markets. The bond’s structure, lack of a sovereign guarantee and concerns over liquidity all reduce the debt’s appeal, he said.

Here’s some basic background about the sale:

Why is Ghana selling the bond?

The country’s five major energy utilities are swamped by too much debt, with 10.8 billion cedis in payable loans at the end of June last year. This is imperiling investments and contributing to power shortages that have caused factories to close and damped economic growth. A successful bond sale would provide payment relief for electricity producers and shore up liquidity in the banks that lent to them, freeing up credit for other industries.

“For the financial and power sectors, this bond is very, very important to clear and improve their balance sheets for healthy economic growth,” said Courage Martey, an Accra-based economist at Databank Group. “If banks don’t lend, the real sectors of the economy will be starved.”

What objections does the IMF have?

In August, Ghana extended a three-year credit facility deal with the Washington-based lender to give the country more time to meet targets on debt management and economic reforms. As part of the accord, the government pledged to lower public debt levels, which was 72.5 percent of gross domestic product at the end of 2016.

That won’t be possible if the energy bonds are counted as a government obligation, so Ghana created the SPV. The IMF isn’t impressed with the accounting maneuvers, and says the bonds are clearly public debt.

“While the energy bond will help clear past liabilities, it will impact public debt,” the lender said by email. “The authorities may want to reconsider its timing.”

Ghana is continuing talks with the IMF on how to classify the debt, according to Sam Aidoo, the head of treasury at Fidelity Bank Ghana, one of the co-arrangers of the energy bonds.

What does the government say?

Officials have acknowledged that the bonds aren’t attracting the interest they want, and said that the slow uptake could be a result of the notes being a new asset class for the country.

“The vast majority of offshore investors that can buy cedi bonds have only got a mandate for sovereign risk,” the government said in a statement. “Over time, and as the structure performs, we expect more offshore buying.”

To be sure, Ghana’s eurobonds are holding up just fine. They returned 18 percent this year, more than double the gains in the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index.

Is the yield attractive enough?

The nation is offering its energy bonds at about 200 basis points higher than the yield on local-currency government debt due in 2026, and 50 basis points more than the average yield on a 10-year auction in April.

The government is expecting foreign demand for as much 40 percent for the total offering, Deputy Minister of Finance Charles Adu Boahen said last month.