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FEATURE STORY

New World Bank Guarantee Helps Ghana Secure $1 Billion, 15-Year Bond

November 18, 2015

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STORY HIGHLIGHTS
  • The International Development Association (IDA) provides a $400 million guarantee to Ghana supporting the country’s new $1 billion sovereign bond
  • Under challenging market conditions, the guarantee stands to help Ghana refinance their existing stock of debt at favorable terms and extend maturities
  • The operation is part of a larger World Bank guarantee-support program for Ghana to improve macro-fiscal stability and attract foreign direct investment into the extractives sector and power generation projects

The Republic of Ghana issued a US$1 billion sovereign bond on October 7 with a 15-year final maturity. The sovereign bond is partially guaranteed by a US$400 million Policy Based Guarantee (PBG) by the World Bank Group’s International Development Association (IDA), which allowed Ghana to place the bond successfully under very challenging market conditions for emerging market issuers.

The Ghana PBG was the first IDA Guarantee backstopping government debt raised for budget support purposes. This operation demonstrates how World Bank Guarantees can be used to help emerging countries refinance their existing stock of debt at favorable terms and extend maturities. It also marks a successful return of the World Bank guarantees to the international bond market after 15 years.

The operation was part of a larger World Bank guarantee-support program for Ghana to improve macro-fiscal stability and attract foreign direct investment into the extractives sector and power generation projects. The program includes US$700 million of World Bank guarantees, extended in support of the Sankofa integrated oil and gas project as well as US$300 million of planned guarantees for private-sector-led power generation projects.

Recognizing the value of the PBG credit enhancement, Moody’s and Fitch gave the notes a two-notch upgrade (B1 by Moody’s and BB- by Fitch) from Ghana’s standalone credit rating (B3 by Moody’s and B by Fitch). Ghana achieved an oversubscribed order book for the notes with strong interest from high-quality, long-term investors. The bond issuance widened the country’s investor base as some bond buyers were first-time investors in Ghana’s bonds. It was Ghana’s fourth bond issuance in the international capital markets, but the first one to reach a 15-year maturity. At the time of issuance, it was the longest in sub-Saharan Africa, except for issuances from South Africa.

How the guarantee works

The IDA Guarantee backstops principal and coupon payments on a first-loss basis. It is designed to ensure timely payment of interest and/or principal by making guarantee support available until the bond is redeemed.

The guarantee structure is as follows:

  1. If Ghana fails to make an interest or principal payment under the bond according to the debt service schedule, IDA pays the missed payment(s) up to US$400 million.
  2. After each payment date, the remaining balance of the guarantee (US$400 million less payments made by IDA) rolls over and becomes available for the next scheduled payment of interest and/or principal.
  3. The guarantee cannot be accelerated and can only be called for scheduled and unpaid debt service payments.

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World Bank Group

The PBG-supported bond issuance was launched at a time of heightened market nervousness about emerging market credits. Other emerging market issuers were forced to scale down or cancel planned issuances. Ghana did not have access to the market for a large-sized, long-tenor bond issue, and its secondary trading levels had deteriorated substantially. Possibly, there was no access for Ghana on a stand-alone basis at the time of issuance. Ghana’s sovereign credit rating had been deteriorating as a result of balance of payments and fiscal deficits caused by a number of external and domestic macroeconomic shocks. To address the high risk of debt distress, Ghana entered into a macroeconomic stabilization program supported by the International Monetary Fund (IMF) in the spring of 2015.

The bond issuance was part of the government’s strategy to improve its debt sustainability. The PBG helped Ghana mobilize substantial private capital from institutional long-term investors to meet its debt management needs at a lower cost. Proceeds from the issuance were used to refinance Ghana’s short-term (90-day to 2-year) domestic debt bearing an interest rate of 25%, resulting in significant interest savings per annum as well as extended debt maturities. The targeted use of proceeds also reduced refinancing and rollover risks associated with domestic debt, adding to the overall positive impact on Ghana’s debt sustainability. A key benefit of extending the final maturity of the PBG bond to 15 years was to smoothen Ghana’s short and medium-term debt amortizations. The principal of the bond will be repaid in three equal installments in 2028, 2029 and 2030 instead of a bullet repayment to allow for a “soft” amortization of the bond.



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