CORONANOMICS: Early US$3bn Eurobond issuance a smart move

… extra US$63m p.a. would have been paid if bond was raised this month

Government’s early market entrance for the 2020 US$3billion Eurobond, in hindsight, has proven to be a smart move, an analysis of the current prices of old and fresh Eurobonds have shown.

With the impact of Coronavirus being felt across the globe via stock market crashes, bond yields or prices skyrocketing, and crude oil prices collapsing, the move to enter the market earlier than expected – government purchased the 2019 Eurobond in March – shows that government has avoided paying an extra US$63million per annum, as at the March 12 analysis on the US$3billion raised.

The US$3billion – raised in three tenors of US$1.25billion at a rate of 6.375 percent with maturity in 2027; US$1billion at 7.875 percent with maturity in 2035; and US$750million at 8.75 percent with maturity in 2061 – would see the payment of US$224million per annum in interest rates.

But the analysis of these bonds, as at March 12, shows that their prices have jumped to 8.41 percent, 10.11 percent and 10.78 percent – which means that if government had gone to the market at this time, which it did last year, these are the prices that could possibly have been quoted; which would have resulted in an increased total interest or coupon payment of US$287million per annum, a difference of a whopping US$62.965million per annum.

Courage Martey, a Senior Economist at Databank Research, noted that the government of Ghana’s decision to execute the 2020 Eurobond earlier than usual has turned out to be an astute move, given the prevailing volatility on the global financial markets.

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“In 2019, Ghana’s Eurobond deal was executed in March of that year as the authorities capitalised on the positive IMF reviews to sell a successful offer. However, the Ghanaian authorities opted to do an early offer in 2020, which also proved to be hugely successful with US$3billion sold in three separate tenors at competitive coupon rates.

“Since the early Eurobond in February 2020, the global financial markets have become exceedingly volatile, due to concerns about the economic impact of COVID-19. More recently, the stalemate at the recent OPEC+ meeting degenerated into a price-war as Saudi Arabia seeks to squeeze Russia and high-cost Shale producers through increased oil production and discounted prices.

“Against this backdrop of negative sentiments, Brent price tumbled to US$32 per barrel on Thursday, March 12, 2020, posting a 52 percent year-to-date loss. The US stock market also took a nosedive as the S&P 500 index tumbled to a year-to-date loss of 21.6 percent at close of trading on March 12, 2020,” he said.

Selloffs hit emerging and frontier markets 

To Mr. Martey, the oil market crash has intensified investor concerns about fiscal and debt sustainability amid weaker external balances for commodity exporters, who are mostly based in Africa.

Despite Ghana’s relatively more diversified export base compared to its peers in sub-Saharan Africa, the spreads on Ghana’s outstanding Eurobonds have widened along with the oil market crash, he noted in his analysis of the markets’ movements for the past week.

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Since the oil market crash on March 6, 2020, when Ghanaians were either home or celebrating Independence Day, the yields for the country’s outstanding Eurobonds have soared to new heights as global bond investors sell-off risky assets in favour of safe-haven assets.

“There is a steep increase in yields across Ghana’s outstanding Eurobonds, with the 2035 to 2061 maturities trading within the 10.1 – 11 percent range,” he said.

Saved by the timing

In view of the prevailing surge in Eurobond yields, Mr. Martey stressed that government’s decision to sell an early Eurobond has helped the country avoid paying punitive coupon rates across the three tenors issued. “For instance, Ghana’s 2051 Eurobond currently trades above 10.5 percent,” he said.

“Since this maturity was used as the benchmark for pricing the 2061 Eurobond issued this year, government would have been confronted by a higher coupon rate in the region of 10.8 percent. In fact, the 2061 Eurobond which was secured at 8.75 percent in February-2020 is currently priced around a yield of 10.8 percent, only about a month later,” he added.

“But, thankfully, the shrewd timing and the decision by government to sell an early Eurobond in 2020 has helped to lock-in lower coupon rates on the US$3billion issued in February. “The story would have been different within the context of the prevailing market conditions,” he added.

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