Credit Markets Get Weird in Ghana Zero-Coupon Bond Plan

Africa’s first zero-coupon dollar bond is getting closer to reality, testing the appetite of credit investors to forgo income for a new kind of emerging-market risk.

Ghana is selling the four-year debt to international investors as part of a $3.025 billion Eurobond deal that also includes 20-year, 12-year and seven-year securities. Zero-coupon notes, which are usually sold at a deep discount to face value, are more volatile than bonds that pay regular interest.

It’s another example of the rush into ever-riskier kinds of debt as investors scour the globe for yield, and show how credit markets have opened up to borrowers that would have historically not been allowed to forgo coupons. Ghana’s debt-service costs devour more than 50% of government revenue, compared with the median of 11% for similar-rated sovereigns, Fitch Ratings said this month.

“Whether the zero is a good deal for Ghana will depend on the yield implied in the discount,” said Stephen Bailey-Smith, a Kolding, Denmark-based investment strategist at Global Evolution. “What it does is free up government cash flow in the short-term, but it makes the amortization lumpy.”

Credit Markets Get Weird in Ghana Zero-Coupon Bond Plan

Yields on the Ghana’s $1 billion of 2030 bonds climbed eight basis points to 6.82% at 3:35 p.m. in New York on Monday to the highest since November, after rising 29 basis points last week.

Ghana plans to use some of the proceeds of the sale to buy back more expensive domestic and international debt and free up cash for social spending after the Covid-19 pandemic battered the economy. The average weighted interest rate on the country’s domestic debt stood at 17.2% at the end of 2020 compared with 5.3% for external debt, according to the finance ministry.

“Given our elevated debt levels and interest expense due to Covid-19, it seemed like a good time to create fiscal space and to drive domestic interest rates down by reducing demand locally,” the interim head of the finance ministry, Charles Adu Boahen, said in a text message. He’s in charge of the ministry while Minister of Finance-designate Ken Ofori-Atta completes parliamentary vetting procedures.

The nation launched $500 million worth of 21-year securities at 9.25%, $1 billion of 13-year notes at 8.75% and $1 billion of 8-year bonds at 7.75%, according to a person familiar with the transaction who asked not to be identified because they are not authorized to speak publicly about the matter. Ghana also is selling $525 million worth of 4-year zero-coupon instruments at 78 cents. The sale is expected to settle on April 7.

“The zero-coupon bond is both novel and ambitious,” Mohammed Elmi, a portfolio manager at Federated Hermes Inc., said in an email. “It allows the sovereign to free up resources to spend on development expenditure, health care and education.”

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