- Ghana may exclude credit-enhanced bonds from debt reshuffle
- Ecuador did not include an IDB-backed bond in the restructuring
- Ghana’s 2030 dollar bond outperforms the rest of the yield curve
LONDON, Dec 2 (Reuters) – Ghana’s debt restructuring plans are set to test a $400 million World Bank guarantee, designed to provide additional security if the West African country does not pay .
Like other smaller and riskier emerging countries, including Sri Lanka and Zambia, Ghana is facing a debt overhaul after its already strained finances collapsed under the economic fallout from COVID-19 and the invasion of Ukraine by Russia.
While Ghana’s troubles have come as no surprise to investors – its foreign bonds have fallen to a third of face value and the cedi has suffered the world’s worst currency slide this year – the way the World Bank guarantee will work is unclear.
Legal experts and investors are currently scouring the contract for the billion-dollar bond at issue, which is due to mature in 2030 and has a guarantee equivalent to the interest payments due over the next four years, to determine Ghana’s options.
Ghana’s finance ministry did not respond to a request for comment on its plans.
“If Ghana decides to use the guarantee, it must repay the World Bank immediately,” said Mitu Gulati, a University of Virginia law professor and debt restructuring expert.
“And it’s hard to do that if his debt is unsustainable.”
The World Bank said at the time of its issuance that the so-called credit-enhanced bond was designed to allow Ghana to sell bonds in 2015 under “difficult market conditions”.
“This is a highly protected instrument that was issued with the logic that Ghana would never default with the World Bank,” Gulati said.
Ghana would be in dire straits if it could not repay the World Bank, a multilateral lender with preferred creditor status, while pursuing discussions with the International Monetary Fund (IMF) for financial assistance.
Syria, Eritrea, Somalia and Zimbabwe are on a very short list of countries in arrears with the World Bank, cutting off their access to a multitude of multilateral lenders.
IN OR OUT?
Ghana has not yet clarified whether the 2030 issue will be part of its debt restructuring.
Rodrigo Olivares-Caminal, professor of banking and finance law at Queen Mary University of London, who advises investors on such issues, said the bond would likely be ruled out because of “multilateral debt implications”.
“The guarantee was designed to intervene in the event of a temporary liquidity problem, not a structural debt problem,” he told Reuters.
Moreover, the guarantee cannot be accelerated “under no circumstances”, according to the contract of surety, so that this amount would not become immediately due and payable for the creditors.
If the bond was included in the restructuring, it is unclear whether the bond would still be in place, Gulati added.
Luis Costa, head of CEEMEA strategy at Citi, also expects “special treatment of this bond to be given.”
Prices for the bond, which has a yield of 10.75%, seem to reflect some optimism. They have shrunk less than any other Ghanaian sovereign debt so far in 2022 and have outperformed short-term bonds maturing in 2025 and 2026 since late September, when an IMF mission began talks for a loan program. .
Credit-enhanced issues, including multilateral guarantees on all or part of the bonds or a link to high-quality sovereign guarantees such as US government bonds, are rare.
However, discussions about them became more prominent again in early 2020 as a tool to help less-developed countries deal with the economic fallout from the coronavirus crisis.
In September 2020, JP Morgan’s major bond index split allowed these structures to become part of its benchmark indices.
But adoption has been limited. Ecuador is one of the few examples to issue a bond with the help of the Inter-American Development Bank.
Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management, said she expected Ghana’s bond could be ruled out the same way Ecuador decided to continue paying the IDB-backed bond in its 2020 debt restructuring.
“There’s not a lot of upside to defaulting on this bond,” Kurdyavko said, adding that it could set “a tougher precedent for the World Bank or any other multilateral loan guarantee instrument.”
Reporting by Jorgelina do Rosario; Additional reporting by Cooper Inveen in Accra; Editing by Karin Strohecker and Alexander Smith
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