Monday, 30 October 2017

Experts speak on ‘pros and cons’ of Energy Sector Bond

Adnan Adams Mohammed

Lead managers of the energy sector bond have said, government may not be paying anything less than 17 percent in interest for bond. 

The interest targeted by the managers is largely due to developments and investor appetite thus far.

Currently, bids are being accepted for the first tranche of the bond to raise GHC6 billion which closed on Friday, October 27, 2017.

The GHC6 billion bond is being auctioned in two bids; a 7-year bid to raise GHC2.4 billion, while the 10-year bid is expected to raise GHC3.6 billion.

However, the Head of Financial Markets Sales at Standard Chartered Bank, Jojo Bannerman has indicated that, the current figures may be subject to change after final pricing.

“For the seven-year we are looking at the range from between 17.7-19%; and for the ten-year bids, we are looking at between 17.8 – 19%. This is just a range that is indicative once the orders and the bids come through, we will then engage the sponsor and the issuer to then decide on what the final cut off rate should be,” he said.
But, some analysts have noted that this being the first time a bond of such nature is being issued, some factors that will influence the rate for the energy bond include; Ghana’s program with the International Monetary Fund (IMF), macroeconomic indicators such as cedi depreciation and inflation as well as the tax policies on investment gains.

Notwithstanding this assertion, an Economist and Lecturer at the University of Ghana Business School, Dr. Lord Mensah has predicted a minimum of 20%.

He explained his reasons for the prediction as, “If you look at this bond, it is going to a specific sector and how the sector has performed over the years will determine the pricing. In addition, investors will be looking at the interest rate dynamics of the country; if you consider the NPP government, it has a tendency to bring down interest rates so if investors are going to commit for some number of years for a particular bond, definitely it must have to make projections for such interest rates.”

Meanwhile, a Research Fellow at the Institute of Fiscal Studies, Adu Owusu Sarkodie is anticipating a strong negotiation by government’s representatives to push the rate down marginally from the 18 percent region.

“Ghana is still part of the IMF program since 2015 and that gives the country some credibility. Also, inflation will be a factor to be considered and any creditor who is going to lend you money at an interest rate lower than the inflation rate is going to lose. Currently, inflation is estimated at 12 percent. As a result, we are not expecting that the rate goes below that figure.”

Among the developments to be expected in the sector is that, commercial banks are likely to tighten their lending to the energy sector soon. It will follow the repayment of the accumulated energy debt to the affected banks.

Dr. Lord Mensah believes that, the reduction in loans to the energy sector is inevitable as the development has adversely affected the financial position of most banks.

Dr. Mensah says the decision would also be influenced by the available options in lending with relatively lower defaulting rates.

“Looking at the duration that these loans have stayed in as much as it is accruing interest, more or less to some banks, it is turning out to be some bad debt. In as much as if government owes you, it is not a bad debt, but then the alternative that you could have used your money for but you are not getting it?” he asserted.

Commercial banks have been the worst hit in the accumulated legacy debt in the energy sector.

The debt is currently estimated at US$2.5 billion. This translates into about GHC10 billion.

As at the end of 2016, the debt stood at an estimated US$2.5 billion. A breakdown showed that the banks are owed US$782 million.

This has largely been accounted for by state-owned Volta River Authority (VRA).

Bankers have always been upbeat about the issuance of the energy bond as they say it will largely help correct their balance sheets.

The Executive Director of Unibank, Clifford Mettle in an interview said, the liquidity situations in most banks are a bit critical…the energy bond will certainly help ease the liquidity so banks are actually looking forward to the settlement,”

Also, Managing Director of Cal Bank, Frank Adu Jnr also indicated that, “the move should correct the balance sheets of banks that are exposed to the debt…This will also restore confidence in the banking sector.”

Apparently, a financial expert and Member of Parliament for Bolga Central, Isaac Adongo has rejected government's reasons for Energy Sector Bond.

He described the reasons given by the yet-to-be-issued energy sector bond as baseless.

According to him, claims by the government that the bond was needed to service the non-performing loans of banks were untenable, as the previous administration had ensured that the debts were being serviced.

He explained that, the Mahama administration had negotiated with the banks to restructure the energy sector debts, and a decision had been taken to end the long-standing subsidies that had been provided to the energy sector companies like the Electricity Company of Ghana and the Volta River Authority.

“All the way back in 2015, a process was started to restructure these debts. We are all aware that as a result of a series of subsidies right from the time of Jerry John Rawlings, through the tenures of Kufuor and Professor Mills. At some point, it was costing us about two billion a year just on subsidies, and we needed to cut it at some point. John Mahama took a bold decision to stop the subsidies, and take stock of where we were in terms of our inability to fund the subsidies to the energy sector companies such as ECG and VRA. That process led to us engaging the banks to renegotiate and restructure those debts so that government will take a decisive step to ensure the debts were serviced,” he said.

“As a result of the process, the interest rate on the dollar component of the loans came down from 12% to 5%, and the interest rate of the cedi component came down from 38% to 22%. We agreed the establishment of an Escrow account managed by the participating banks, the Bank of Ghana and the Ministry of Finance into which the receivables from these companies would go into as a first priority. The second was to get Parliament to pass the Energy Sector Levy Act, that was described in various terms as a nuisance tax and that the President referred to as the reason why electricity tariffs were higher than rent. We ensured that from the proceeds from the loans were now being serviced as restructured.”

Isaac Adongo insisted that, the then government’s efforts had resulted in a turnaround in the rate of the non-performing loans, with banks recording a drop of 2% in the last three months of 2016.

This he said negated the government’s arguments, as the fact that the debts were being “consistently serviced” meant that the loans were no longer non-performing.

“The [NPP] government is quite desperate and the desperation is informed by what they term as the urgency to deal with the Energy sector debt in the banks to the extent that they feel that is creating a problem for non-performing loans and a challenge for the banks. I think that they are trying to create an excuse that only exists in their minds.”

“The Monetary Policy Committee’s own report at the end of January 2017 for the year ending 2016, made it quite clear that the non-performing loan portfolios of our banks began to decline from 19% in October to 18% in November, and to 17% in December. This excluded an amount of $165 million that was disbursed in December from the ESLA. As a result, you cannot describe a loan that has been serviced to date as non-performing. How else does a loan perform?” he queried.

Government is reportedly targeting at least 19 percent interest rate on the energy bond to be issued to clear the debts in the energy sector.

This is relatively higher compared to the estimated 18 percent rate on the ten-year domestic bond.

Sources close to the bond issue also indicate that, the corporate nature of the energy bond has influenced the decision to peg anticipated interest rate above that of the current ten-year domestic bond issued by the government of Ghana, which is estimated at 18 percent.

The IMF and government are expected to reach an agreement on the mode of issuing the bond this week, which should also clear the way for the issuance of the energy bond by close of this week.

An earlier statement on the bond indicated that, the first tranche is expected to raise GHC6 billion; the equivalent of US$1.3 billion dollars.