The Republic of Ghana took a place in the record books last September when it launched a blowout $750 million, 10 year Eurobond – the first sub-Saharan sovereign in 30 years outside South Africa to access international capital markets.
The market agreed that the deal had been cannily executed and highlights the increasing sophistication of public financial management in the continent.
Its timing also deserves special mention. Hostile global conditions and initial shockwaves from a global credit crisis had virtually closed the world’s debt markets. Only a couple of emerging market names had been able to tap international capital markets that summer.
The book was large too – $3.25 billion of orders were placed – reflecting a growing interest in African sovereign paper as well as the lack of supply from developing economies following extensive buybacks in Latin America.Pricing for the landmark issue was complicated due to the lack of comparable deals. US investors unfamiliar with African risk made comparisons with Argentina and Venezuela while European accounts looked for comparables with Indonesia and Pakistan.
But given the unique political and economic structures of these credits, as well as the array of prices for their paper, bookrunners Citigroup and UBS relied on investor feedback.
Nevertheless, “there was a wide range of opinions on where value was on the deal,” says Maryam Khosrowshahi, co-head of EMEA debt capital markets at Citi. She said US investors suggested coupons as high as 9.5%, while European fund managers were happy with 8%.
“The guidance of 8.5% to 8.75% tried to encompass this feedback and bridge this gap between accounts,” she says. In the end, the Reg S 144a bond was priced at par with a 8.5% coupon – offering the equivalent to 387bp over US Treasuries.
DEMAND DRIVEN
Appetite for Ghana was such that the bond tightened by 19bp over Treasuries at the end of its first day of trading. “The fact that it traded well in the aftermarket highlighted how many investors felt under-allocated,” says Simonas Eimaitis, director of emerging markets syndicate at UBS.
“Ghana could have probably done the deal slightly cheaper if it were a smaller size but liquidity matters to investors and Ghanaians always wanted this size, so a smaller deal may have caused disappointment.”The funds raised have been specifically allocated to overhaul Ghana’s road and energy infrastructure – crucial investments to ensure the country’s long-term development.
Citi and UBS sought long-term, real cash investors keen to hold the bond to maturity. This helps ensure good aftermarket performance and removes much of the risk of a volatile sell-off in deteriorating market conditions that would have discouraged other new borrowers.
By region, UK investors bought 28% of the paper, other European investors took 29%, US buyers 42% and Asian managers 1%. By investor type, asset managers took 65% of the bonds, hedge funds 17%, banks 18% with insurance companies and pension funds holding the rest.
Even the hedge funds are long-term, buy-and-hold investors, bankers say. Ghana relaxed restrictions on foreign investors buying medium-term domestic government bond auctions at the end of 2006 and as a result, the hedge funds that participated “already had intimate knowledge and exposure in the continent via the domestic markets,” says Eimaitis.
He said the deal’s success also reflects investor confidence that the country has undergone sufficient reforms to ensure that its debt management mechanisms are sufficiently robust to handle the large size of the deal.
Speaking to Emerging Markets in the week the bond was being priced, Ghana’s finance minister Kwadwo Baah-Wiredu said investors should reward the country’s improved fiscal standing and structural reforms by participating in the sale: “We have come a very long way since the 1990s and investors should understand we have stepped up reforms.”
Credit analysts agree. “Ghana has emerged as a trend setter in sub-Saharan Africa, having entrenched political stability and put in place macroeconomic policies that have secured it extensive external debt relief under a series of international creditor-driven initiatives,” says Paul Rawkins, senior director in Fitch’s sovereign rating team in London.Debt relief initiatives have reduced the government debt to GDP burden from 70% in 2005 to 41% in 2006 – in line with ‘B’ rating category medians. BENCHMARK FOR OTHERS
The deal also represents a clear benchmark for future African sovereign deals. It provided, for example, a pricing comparison for Gabon’s $1 billion 10-year deal in December, which paid 8.2%. Zambia, Tanzania and Kenya along with a couple of high profile Nigerian banks are expected to launch global issues this year.By establishing the start of a benchmark sovereign curve, Ghanaian corporates will later be able to price their own debt in relation to that of the republic.
Interestingly for the future of African debt, investors are intrigued by the bond’s trading pattern as it tends not to follow the broader market. “This bond qualifies as an uncorrelated asset,” says UBS’ Eimaitis. The implication is that in uncertain market conditions, African sovereign debt could prove to be a safe-haven for investors while other markets are in disarray.
If true, the turn-around in perceptions of African creditworthiness will be nothing short of staggering.