Background

The Government of Ghana’s debut international sovereign bond issue made international headlines as the first sovereign bond issue by a sub-Saharan African country outside South Africa and as a winner of two awards at the 2008 International Financing Review Awards. The awards were presented to representatives of the Ghana Government and to UBS and Citigroup, the joint lead managers of the bond issue. The transaction team, with Denton Wilde Sapte as the lead international legal adviser to the Government of Ghana, had worked for over two years to bring the successful bond issue to the international market. This article takes a brief look at the transaction and shares some of the reasons for its success.

Ghana has come a long way from being classified as a Highly-Indebted Poor Country (HIPC) under an IMF programme for debt relief to achieving a B+ rating on the international bond markets. Historically, Ghana had relied on concessional loans especially from the IMF and the World Bank for its developmental programmes. Although the terms of these loans were comparatively generous, they came with several drawbacks. Firstly, these loans often came with conditions that were not always consistent with national policies. Besides, the size of the loans was often too small to meet infrastructural needs for accelerated growth. They also typically came with high hidden costs - long gestation periods from conception stage to being advanced could be up to three years. Delays could be costly in economic terms. Additionally, there were frequent appraisals, review missions, monitoring and evaluation, all of which tied up significant national resources.

To mitigate these disadvantages, the Ghana Government sought to diversify its funding sources in order to develop its energy sector and infrastructure.

The strategy

Doing its homework: The Government first set about achieving the necessary political and economic platform to attract international investor interest. Politically, Ghana is one of the stable democracies in Africa with a democratically elected government since 1992. This has again been shown in the peaceful transition following the recently hotly contested and close presidential election. On the economic front, deliberate reforms undertaken since 2002 with support from its international partners had transformed the nation’s economic conditions and prospects. For example, annual inflation had declined from 40.5 per cent in December 2000 to 10.1 per cent in July 2007; interest rates (12.5 per cent) were at their lowest levels since 1985. The exchange rate depreciation against the US dollar was at 0.8 per cent between January and July 2007. External debt had reduced from roughly US$8.0 billion in 2003 to roughly US$2.7 billion in 2007. Also the overall fiscal deficit had reduced from 9 per cent in 2000 to 2.47 per cent by the end of June 2007. Domestic debt had declined from 24 per cent in 2000 to 13.6 per cent in June 2007. In effect, decades of political stability coupled with good macroeconomic and social indicators were the ideal launching pad for a foray into the international capital markets.

Political will: Secondly, there was political will at the highest levels and the support of cabinet and public officials in the relevant ministries went a long way to ensure the success of the issue.

Competent transaction team: Thirdly, the Ministry of Finance assembled an able transaction team to supervise and undertake the issue. Key officials at the Ministry worked with Denton Wilde Sapte, local legal counsel and the lead managers supported by local co-managers.

Structuring the offer: The transaction was priced at 8.5 per cent following a six-day roadshow. The bonds achieved a B+ rating from Standard & Poor’s. In the end, the 10-year bond was sold at par at the tight end of the initial price guidance.

Despite the market volatility and heightened risk aversion sentiments, the offering was more than four times oversubscribed with investors eager to take part in a transaction by a rare sovereign issuer. The transaction generated an excess of US$3 billion in global demand with 158 investors participating in the order book. Asset managers took 65 per cent and hedge funds 17 per cent, leaving 18 per cent for banks, insurance companies and pension funds. The success of the issue was obvious in the size of the wide orders and distribution of the bonds.

The book building process

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Telling the Ghana credit story: This being a debut sovereign bond issue for the country, much time and effort went into marketing the country and the issue. The transaction was priced following a six-day investor roadshow covering the US (Los Angeles, New York City and Boston) and Europe (London, Frankfurt, Munich and Zurich).

Secondary trading

The transaction initially produced a strong secondary market performance, as investors were keen to buy the Ghana paper. The bond price stabilised around the 102 region and the bid/offer spread was tightest at issue because of the high liquidity.

The Ghana Eurobond traded above par until the global financial crisis in July 2008. However, from August 2008, like most financial assets, it was sold off and reached a low of just under 48 cents in the dollar in late November/early December 2008. Since then it has staged a recovery and as at July 2009 was trading at 80-85 cents in the dollar with a yield of about 12 per cent.

Conclusion

With the issue, Ghana achieved several firsts. It was the first sub-Saharan sovereign state to enter the international bond market, selling a benchmark issue to raise US$750 million, and was the first post-HIPC country to tap international capital. The sale underscored a continuing robust appetite among some investors for high-yielding assets, particularly in emerging markets, despite the turmoil that has affected investor sentiment in the wider financial markets.

The Ghana bond achieved another success in that it provided a key benchmark for assessing other bonds emanating from Ghana. This was proved soon after, when Ghana Telecommunications Group successfully issued its first attempt in the international markets.  

This article is based on a presentation made by Dr Sam Mensah, Technical Adviser, Ministry of Finance and Economic Planning, Ghana and Transaction Manager for the Government.