Ghana surprises investors by suspending debt payments
Ghana suspended interest payments on its external debt, catching bondholders by surprise ahead of restructuring talks aimed at unlocking an International Monetary Fund bailout.
The West African nation on Monday suspended payments on $13 billion of eurobonds, as well as commercial loans and most bilateral obligations pending an agreement with creditors, the Ministry of Finance said in an emailed statement. The unilateral move stands to complicate negotiations with creditors that were set to start formally within days.
Ghana’s international bonds fell, while the currency advanced after the announcement. The nation secured a staff-level agreement with the IMF last week for a $3 billion three-year extended-credit facility. The approval of the arrangement by the IMF executive board is subject to an agreement with external creditors, the Washington-based lender said.
“The market was probably expecting that Ghana would try to avoid an outright default and continue to service debt while the restructuring is negotiated, but clearly that perception of goodwill from the government side was wrong,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management in Zurich, which holds Ghana bonds. “It does change the perception about how market-friendly the restructuring negotiations will be.”
Ghana’s bonds due 2032 fell 2.3 cents on the dollar to 32.9 cents by 1:15 p.m. in New York, according to data compiled by Bloomberg. The extra yield investors demand to hold the sovereign bonds over US Treasuries rose by 150 basis points on Monday to 30 percentage points, according to JPMorgan Chase & Co. data, well above the threshold for debt to be considered distressed.
The Trade Association for the Emerging Markets, known as EMTA, on Monday recommended all trades of Ghana’s sovereign bonds entered into on or after Dec. 19 should trade “flat,” unless otherwise agreed.
The government had “conversations” with international bondholders and their advisers and would start official talks “in the next few days,” Finance Minister Ken Ofori-Atta said in an interview Friday.
“We would like to certainly go to the IMF board as soon as possible,” he said. “Within the negotiating space is understanding that an orderly process is what is good for all of us. And so my suspicion is that we’ll get to a good discussion and announce the measures before end of this year.”
Ghana earlier this month announced a voluntary domestic debt-exchange program for its local bonds that involved interest losses for holders. With investors slow to sign onto the program, the government was compelled to extend the deadline a second time to Dec. 30 from Dec. 19. The government would consider changing the terms during this period to accommodate bondholders, Ofori-Atta said.
Limited Resources
Monday’s announcement, which is an interim measure pending agreements with all relevant creditors, was necessary to prevent a further deterioration of Ghana’s fiscal situation, the finance ministry said. The nation’s financial resources including international reserves are limited and need to be preserved, it added.
But bondholders said the country should have requested a debt-service suspension in talks with investors, rather than suspending payments unilaterally.
“The market thought a restructuring was inevitable, but it was hoping that it would be done on a consensual basis so Ghana would stay current on eurobonds payments while the restructuring parameters were agreed,” said Joe Leadbetter, a London-based credit analyst at Emso Asset Management. “So the decision to unilaterally default, without requesting a debt-service suspension through a consent solicitation, is a surprise.”
Fitch Ratings lowered Ghana’s domestic debt rating to C from CC after the domestic debt exchange program started, with plans to cut it again to a default score of RD once the bond swap is completed. S&P Global Ratings slashed the local ratings to selective default, while Moody’s Investors Service also considered the local debt exchange a distressed event that would constitute a default.
Further losses for the nation’s bonds are likely as investors prepare for restructuring talks that may be unfriendly, said Richard Segal, a research analyst at Ambrosia Capital in London.
The announcement is “somewhat surprising, as this reduces the prospect of the restructuring being amicable,” he said. “It shouldn’t have a long-term bearing, but it’s clearly negative near-term.”
