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Company News of Monday, April 22, 2019
Source: Maxwell Investments Group
2019-04-22
The writer seeks to educate the public about the links
When a business, a union, a government or any other entity has to borrow money to, for example, run the business, embark on new projects, repay old loans, proceed to an aggressive expansion or for any reason, issue what are called "links" to interested parties. Simply put, a bond issued successfully is an accepted loan. The borrower is the issuer of the bond and the bond will contain the terms of the loan, eg. the interest rate (or coupon rate), how the interest payments (or coupons) will be made, the time at which the total amount must be paid to the investor ( due date), etc.
It's a link.
What's a Eurobond?
EURObond only means that the issuer is not in the same country or is trading in the local currency of the investor / lender. A Eurobond does not necessarily have to concern Europe or the euro. This only underscores the international aspect of the obligation and the involvement of foreign currencies.
As Ghanaians, the Eurobond means that the loan will be denominated in foreign currency, especially in dollars. This should explain the recent confidence of the government in halting the fall of the Ghana cedi against the US dollar. The Eurobonds they issued meant that dollars were entering the system, reducing the scarcity and the resulting dollar demand.
The Eurobond, also known as the external bond, is issued in one country and sold in another. The bonds are grouped according to the currency in which they are denominated. For example, bonds issued in US dollars call Eurodollars.
How euro bonds work
Anyone in need of loans denominated in foreign currency for a fixed term can offer Eurobonds at fixed interest rates. Private organizations, international unions and the government can offer them. Buyers or investors of these Eurobonds are usually large companies, banks or financial institutions. Interest is calculated annually and principal amounts are paid on the due date.
Ghana offered its first Euro-bond in 2007 for $ 750 million, asking investors to lend this amount with the promise to repay it in 10 years with interest. The bonds were issued through the intermediary of the Bank of Ghana, while the government received the cash amount in the form of loan.
The general popularity of Eurobonds lies in its ability to be a financing tool. They offer a high degree of flexibility. For governments, this is usually an option for immediate and long-term financing. An investor considers several factors in determining which country to target for Eurobonds, for example: favorable interest rates, a stable market, local regulations or the presence of potential investors. These can all play a role in the decision.
Ghanaian Eurobonds, present and past
I am sure you have already read or heard that Ghana has issued a $ 3 billion Eurobond. It simply means that we have accepted a $ 3 billion loan from the outside. Finance Minister Ken Ofori-Atta indicated in Budget 2019 that the government intended to do so. What's really interesting is that when we asked for $ 3 billion, we were offered an impressive $ 21 billion and we still only accept $ 3 billion. The additional offers left room for lower rates and better engagement conditions, as with any trading scenario when the demand for what you are offering is high.
Also note that we issued not one but three bonds with three different maturities (return on investment time). We will therefore repay the $ 3 billion in installments, each payment having its own terms and conditions. The maturity period for the first payment is 7 years at the rate of 7.875%, the second 12 years at the rate of 8.125% and the third 31 years at the rate of 8.950% which will be repaid in 2050. Ghana has never issued a 31 year bond. We have issued Eurobonds seven times in our past; 2007/750 million dollars / 10 years, 2012/1 billion dollars / 12 years, 2014/1 billion dollars / 12 years, 2015/1 billion dollars / 15 years, 2016/750 million dollars / 5 years, 2018/1 billion dollars / 10- last year and 2018/1 billion dollars / 30 years.
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The benefits of all this depend on how the government invests the proceeds of these bonds. Eurobonds are issued in dollars. They are therefore exposed to exchange rate risks which can have a considerable and rapid impact on yields. For example, if the cedi depreciates against the dollar, the government will have to collect more taxes to translate into dollars or even borrow more to pay our foreign creditors. Poor management and misallocation of funds will only further damage the economy.
And the IMF warns us.
Although we broke up with the IMF, they always seem to slip into our DMs with a message or two from time to time. A bond issued is a loan. The IMF warns that with all this money coming in, we have to pay back from time to time. If we do not invest it properly to generate growth and repayment capacity, we will have a debt crisis later. I have always said that mismanagement is the most important problem facing our country.
Recently, the world is watching Ghana. Macroeconomic data validated by the international community now indicate a promising future. While the global bond markets were secretly scrutinizing Ghana, we left the IMF and planned $ 3 billion in Eurobonds, but we received seven times this offer ($ 21 million). It is as if you are leaving your wife and suddenly receive 21 messages from other defendants the next day after announcing the separation, but you only expected 3 IMs. It means you are hot! Ghana looks very hot right now and the IMF says that the risk of debt vulnerability exists if the proceeds of these bonds are not managed properly.
The IMF is absolutely right.
Nevertheless, this increased scrutiny and attention by the international community and foreign investors has the power to strengthen macroeconomic discipline and advance transparency and structural reforms. Because the people we welcome now are renting us. If we intend to woo them further, Ghana must manage its affairs properly. We must eliminate corruption as much as possible, respect all financial commitments and respect loan deadlines. The wrong economic policies will have a price if investors do not feel comfortable with our long-term macroeconomic strategies. If foreign investors and the international community are not happy, they will look away to find greener pastures.
The IMF is 100% right with its caution.
The benefits of the euro-bond
Ken Ofori-Atta, Minister of Finance, has revealed to legislators in Parliament that 30 billion GH ¢ are needed to fill the infrastructure gap. This is one of the many flaws in our economic structure that needs to be repaired and will require a lot of money.
Ghana has pre-repayable loans that could send the wrong message if they are past due.
The economic ambition of the nation is high. There are bold initiatives that require funding to be updated.
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Borrowing from abroad is good for the economy rather than borrow on the domestic market. If the government borrows on the domestic market, competition for funds will raise the interest rate. Given that Eurobonds issued yield money from elsewhere, the additional supply of liquidity in the economy can potentially reduce banks' lending rates and facilitate the productive sectors of banks. l & # 39; economy.
Ghana has recently separated from the IMF. Previously, we took money from the IMF, the World Bank, International Aid or concessional loans from friendly countries. Many times, the conditions attached to these loans prevent us from operating independently. On the other hand, Eurobonds tend to be subject to few conditions. This gives the government the freedom to use the funds as it sees fit.
The conditions of Eurobonds are generally favorable. So, the government can steal the proverb Peter to pay Paul when his conditions are worse than those of Peter. Eurobonds with low interest rates and longer maturities can pay old loans with higher interest rates and / or shorter maturities. This can increase the country's credit rating.
While global interest rates are expected to rise, getting a long-term, low-interest loan can be a good thing.
And as noted earlier, foreign currency inflows can stabilize the cedi by reducing the scarcity of foreign exchange in the markets.
Conclusion
Companies such as Guaranty Trust Bank in Nigeria and Vodafone Ghana have successfully issued Eurobonds. This is not new. Ecobank Transnational Incorporated, the parent company of the Ecobank Group, announced last week the creation of its first successful Euro-bond of $ 450 million. It's nothing too confusing. This seems like a good alternative if it is handled properly. Although some investors consider it risky to invest in Africa, rest badured, our recent Eurobond has been oversubscribed seven times. Our request has been satisfied seven times. But good management is key to the success of these Eurobonds efforts, as in any financial situation.
The government first announced its intention to raise $ 3 billion in international capital markets in the 2019 budget statement. $ 1 billion would be used to refinance Eurobonds 2023, 2026 and 2030, and Another $ 2 billion will be used to cover this year's budget needs.
Last year, the United Nations Special Rapporteur on Extreme Poverty and Human Rights wrote on the Infrastructure for the Eradication of Poverty (IPEP) program, for which funding of 665.2 million GH ¢ has been allocated. An amount of 106.87 million GH ¢ is earmarked to support economic activities in the communities of Zongo. And another 300 million GH ¢ for the Plant to Feed and Create Jobs program.
We ensure the proper use of these funds for long-term economic value, as well as economic policies that strengthen our repayment capabilities.
Contact me on social media and discuss more, if you want. Let's continue the conversation!
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