Is there really a conflict of interest situation in Ghana's US$2.25 billion bond issue?

The Ministry of Finance, through the book building process, recently issued 7- and 15-year bonds at a coupon rate of 19.75%.

The bonds were oversubscribed with international investment firm Franklin Templeton buying a significant portion of the bonds issued.

In the aftermath of this bond transaction, Ghanaians have raised conflict of interest concerns regarding the Finance Minister, Ken Ofori Atta.

These issues have bothered on the participation of Franklin Templeton, the pricing of the bond and the manner in which the funds were raised.

We would like to evaluate the issues at hand, with particular consideration to historical antecedents and our current economic and legal circumstances.

Franklin Templeton is a global investment management firm headquartered in the US. Concerns have been raised about the firm’s connection with Trevor Trefgarne, who currently chairs the Enterprise Group (GSE: EGL), a listed Ghanaian company involved in the insurance business.

Trevor Trefgarne is also a non-executive Director of Franklin Templeton Investment Funds. Enterprise Group Limited is partly owned by the Databank Group through Ventures and Acquisitions Limited which holds a 35.89% stake in EGL.1

The Databank Group was founder by Ken Ofori Atta, the current Finance Minister. Mr. Ofori Atta has also sat on the board of EGL in the past, pointing to a connection between him and Mr. Trefgarne, and possibly Franklin Templeton Investments.

Despite the possible conflict of interest issues that may be raised, Franklin Templeton have historically participated in Ghana’s bond issuances. In fact, Franklin Templeton took part in Ghana’s 2013 Eurobond, as reported by Reuters in July 2013.2

Earlier that same year, the firm also reported at the end of March that its exposure to dollar-denominated Ghanaian bonds had contributed positively to the performance of its emerging market bond portfolio in the first quarter of 2013.3

This implies that Franklin Templeton already held Ghanaian bonds even before the 2013 Eurobond issue, most likely the 2007 issue which marked Ghana’s debut into the global Eurobond market.

As a result, its participation in the latest issue is not a novelty and should not be misconstrued as such. Franklin Templeton, according to the Ministry of Finance, has held Government of Ghana bonds of up to USD2bn before this transaction. In reality, the particular fund manager with the firm who purchased Ghana’s bonds, Michael Hasenstab, is a well-respected global bond trader whose fund is ranked number one in its category over a 10-year period by Morningstar Research.

His investments have mainly been directed at high yield bonds from distressed economies that have eventually turned around, pointing to confidence in Ghana’s ability to turn around our current macroeconomic situation for the better.

The yields on both bonds that have come into contention, stood at 19.75%.

There have been concerns raised about the pricing of the bond, and whether it sought to favor the buyers over the interest of Ghana.

It is noteworthy to remember that Ghana’s first 10-year bond, which was issued in November 2016, was sold at a yield of 19%.

Since investors almost always demand a maturity premium for longer-term debt, it is reasonable to expect that bonds issued at a longer maturity than last year’s 10-year would require a higher yield; thus, the 19.75% on the 15-year is appropriate, although one could not say the same for the 7-year.

In addition, the comparison to 2016’s 10-year dollar bond is unfortunate, since yields on bonds denominated in different currencies are not directly comparable.

Concerns have also been raised over the foreign firm’s participation, including an allegation by the minority in parliament that it effectively means the bond cannot be classified as a domestic issue.

However, bonds with a maturity of 2 years and above are indeed open to foreign investors. In addition, such bonds do not need parliamentary approval prior to issue, although Eurobonds do because they are denominated in foreign currency.

As such the bond issuances, which were denominated in Ghana Cedis, are domestic bonds despite foreign investor participation.

Although the significant proportion of the bonds taken up by foreign investors may expose the nation’s economy to exchange rate pressures when those investors decide to sell off and repatriate their holdings, these concerns are economic in nature, and do not represent a contravention of Ghana’s statutes.

There are however, some questions in relation to this bond issuance that begs for answers.

Under the book building process, the book-runners (Barclays Bank, Stanbic Bank and Strategic African Securities) have previously organized investor presentations and gauged investor expectations on return at least 3 days before the issue date of the bond.

For a transaction of this size (GH¢4.8bn), the Ministry of Finance and the book-runners could have engaged and courted the interest of institutional investors like pension funds, partly in order to establish market-based initial pricing guidelines.

Going forward, the Ministry of Finance and the book-runners must ensure that market sentiments are reflected in the pricing of bonds by allowing all interested investors ample time to make bids for its debt securities.

1 Enterprise Group Limited, 2015 Annual Report

2 http://af.reuters.com/article/ghanaNews/idAFL5N1HC4QM

3 http://www.franklintempleton.de/downloadsServlet?docid=hdmnvetw