Funky Ghana 2030 Bond
Hardly the kind of uncertainty a guaranteed bondholder wants to think about.
Massive Covid expenditures, rise in global interest rates, and the Russian invasion of Ukraine. These are some of the reasons why Ghana is short on money. Additionally, their borrowing spree over the past decade has put them on the brink of collapse. Ghana owes a total of $50bn. Around $14bn is denominated in foreign currency, including a $1bn bond due in 2030. This bond was partially guaranteed by the World Bank to around 40% of the principal amount. This was an unprecedented step by the World Bank as Ghana had no access to international financial markets for large-scale capital raising. Although Ghana is in a deep economic crisis, holders of the 2030 bond can take comfort in the fact that there will be a partial payment, unlike other Ghanaian bonds, as a result of this guarantee. However, upon a closer look, there are some concerns.
Issued in 2015, the Ghana 2030 bond contains an aggregated “collective action clause.” This clause is supposed to ensure the orderly restructuring of the debt. As opposed to earlier government bonds, there is a new aggregation mechanism, which, simply stated, allows various bond series to be consolidated and restructured in a single vote as long as 75% of creditors approve.
In the 2030 bond case, it can be part of a big foreign currency bonds pool with the same collective action clause, for voting purposes. Then, if 75% of the creditors favor a restructuring, the 2030 holders would be forced to undergo the same restructuring. In return, does the World bank guarantee get annulled? Either that or the World Bank guarantees all restructured debt, which is impossible.
The “uniformly applicable” requirement seems to not require respecting differences in the value of different bonds. This leaves holders of the 2030 bond in an unfair situation because they can be forced into the same restructuring deals as the holders of the non-guaranteed bonds. The justification of this provision rests on the reasoning that holders of various securities might find their interests colliding during a crisis. But they don’t. I would imagine the Bank would want to protect the value of its guarantees, thus stepping in. They could collect the 40% guaranteed portion of the Ghana 2030 and restructure the remaining amount as a standard Eurobond.
On the high chance that Ghana misses a debt payment, the guarantee kicks in; the World Bank makes the payment to bondholders, and Ghana owes the Bank instead. Due to the World Bank’s “preferred creditor status,” it gets paid first and in full. Therefore, Ghana cannot default on that obligation (it would also put a “blackeye” on their IMF negotiations). The guarantee is restored as soon as the Bank is paid, ensuring that the following payment is also covered. However, this was designed to solve temporary liquidity issues, not structural debt problems.
Argentina is a curious precedent. The World Bank tried an interesting debt restructuring when Argentina defaulted in 2001. They said Argentina could repay the money gradually between 2005 and 2009, contrary to what the bondholders were hoping for, demanding immediate repayment. Will the World Bank again resort to this solution?
In conclusion, this bond is funky. There is too much uncertainty and possibly fancy legal work attached. This could also be the second time bondholders get minimal benefit from a World Bank guarantee. Hardly the kind of uncertainty a guaranteed bondholder wants to think about.
Written by Sinan Bankaci