South African Lender takes $27.3m write-down as Ghana grapples with sovereign debt
FirstRand Limited, Africa’s biggest bank by market capitalization, has announced that it has written off more than half the value of its holdings of Ghanaian bonds, as the country struggles with a restructuring of its sovereign debt. The South African lender disclosed in a statement on Thursday, March 2, 2023 that it had impaired $27.3 million to cover potential losses from Ghana’s debt revamp, as well as reduced income from associates.
The write-down includes both domestic and foreign-currency bonds held as of December. The bank has marked down both the local-currency and Eurobonds, taking a haircut at 57% of face value, according to Chief Executive Officer Alan Pullinger. However, he admitted that the figure may be at the conservative end, as the market may be talking of 40%.
The impairment by FirstRand Limited follows a significant restructuring of Ghana’s sovereign debt, which is expected to cause significant weakness in local banks’ capital, according to credit rating agency, Fitch. Despite several delays and modifications, Fitch maintains that Ghanaian banks’ capital will still weaken significantly as a result of the debt restructuring.
Under the final terms of the domestic debt exchange programme, banks exchanging existing local-currency (LC) government bonds for new bonds with lower coupons and longer tenors will suffer only modestly lower net present value (NPV) losses than under the original terms. The Ministry of Finance announced on February 14, 2023 that the programme had closed, with creditors representing about 85% of eligible bonds taking part.
Fitch views this as a distressed debt exchange and downgraded Ghana’s Long-Term LC Issuer Default Rating (IDR) to Restricted Default from ‘C’. Ghana’s Long-Term Foreign Currency (FC) IDR remains at ‘C’ given the government’s suspension of payments on selected external debt pending a restructuring of such obligations.
However, the Ghanaian government has only partially completed the domestic-debt part of the exchange plan, and has already missed a self-imposed deadline to restructure its bilateral liabilities by the end of February. As such, private creditors in Ghana may face higher losses than expected amid the debt restructuring, with S&P estimating that they may have to write off as much as 50% of their holdings, far higher than the 30% the government initially suggested.
The situation in Ghana is just one example of the challenges faced by African nations in restructuring sovereign debt. According to experts, these challenges are likely to persist for some time, as the impact of the COVID-19 pandemic continues to weigh on the continent’s economies. In the meantime, banks such as FirstRand Limited will need to closely monitor their exposure to these risks and adjust their strategies accordingly.
