Ultra-long makes sense for EM sovereigns
Long duration bonds, such as Ghana’s 40 year tranche sold this week, are a great idea for African issuers, leaving the borrower’s ability to manage its debt in its own hands rather than at the whims of the market.
When low rates have sparked previous bull runs in emerging market bonds, sub-investment grade issuers have drawn concern from observers wondering how they will repay the debt after it matures, when conditions might not be quite so fantastic as to permit easy refinancing.
Long duration bonds are the perfect answer to the problem, especially for borrowers like those in sub-Saharan Africa, which typically have a high needs for long-term infrastructure investment. It is a great match of assets and liabilities where more typical five and 10 year bonds make it difficult to fund such projects effectively in the public markets.
When markets are this good, borrowers should take full advantage and lock in low cost funding. Longer dated bonds give an emerging market sovereign ample time to develop and grow. When it returns to refinance, the rates on offer to it will reflect whether the country has managed its finances over the duration well, as much as the prevailing wider market environment. It gives an emerging market a chance to well, emerge.
Longer duration bonds will of course cost more at the time of issuance than shorter dated debt. But in the long-run EM issuers such as Ghana are paying to be the masters of their own fate.