A lecturer at the Ghana Banking College and CEO of Universal Capital Management, Dr. Richmond Atuahene, has said the new minimum capital required of banks partly explains why they did not lap up the ESLA bond.
As of Friday, October 30, which was supposed to be the deadline for subscription of the bonds, only GH₵3.4billion out of the GH₵6billion – representing 57 percent – had been realised, leading to a one-week extension of the 10-year bond’s auction being announced.
Commenting on this, Dr. Atauhene said banks are currently capital-deficient and would rather focus on meeting the new minimum capital requirement of GH₵400million.
“We have banks that have capital deficiency; and if I am a bank looking for capital, why would you want me to participate in a bond? So, there is a correlation between capital deficiency of the banks and undersubscription of the bond.
“The banks that are supposed to buy the bonds are, at the same time, being asked to look for money to recapitalise. So, if I am a shareholder there is no way I would advise my bank to get involved in the bond subscription when I don’t know whether I will be able to meet the new capital requirement by 2018. And meeting the capitalisation now is more important than buying a government bond,” he told the B&FT in an interview.
Aside from the capitalisation issue, Dr. Atuahene is also of the opinion that investors are shying away from the bond because of uncertainty in the macroeconomic fundamentals of the country.
“There are also fundamental issues in the economy. They were given 19 percent, but is government prepared to manage the economy such that inflation can be at 5 percent? Because if inflation is even at 15 percent, it means your real return is 5 percent. Couldn’t the bank get another investment that would give it more than that 5 percent? So, people are not very convinced about the future macroeconomic environment,” he said.
Again, Dr. Atuahene argues, investors see the assets being written off as “toxic”, hence, the undersubscription.
“The Energy bond is basically the loans of ECG, VRA, GRIDco, BOST and the like. The underlining asset that is being restructured into a bond is a toxic asset; and how can I make returns” on a toxic asset? In buying bonds you want to know what asset is being underwritten, and I am saying here that they are toxic assets from VRA, ECG and GRIDco.
“What I mean by ‘toxic’ is that they are assets that are of no good to anybody. In good sense, banks could have written it off if they had good capital and reserves. Do you want me to get a return on toxic assets? So, I am not surprised that the bond is undersubscribed,” he said.
In his analysis of why the ESLA bond was undersubscribed, Arnold Dublin-Green – Portfolio Manager at Ecobank Asset Management, also cited lack of clarity on whether the bond was a sovereign one or not.
“Firstly, the lack of clarity on whether the issue was sovereign backed or not – coupled with the uncertainty on whether to classify the bond as sovereign, corporate or quasi-sovereign…And while Ghana used the SPV structure to have the bonds excluded from reported public borrowings, the IMF classifies it as government debt as it will be serviced from state revenues.
“Ghana is a frontier market – once there are doubts as to whether government will back a paper, investors cannot justify taking on non-sovereign risk for a non-investment grade local currency bond in a frontier market with limited liquidity priced around the same level as the government benchmark,” he said.