Ghana’s pension funds are close to agreeing to a deal to restructure $2.6 billion worth of government bonds they hold, according to an umbrella body for the industry.
Under the plan, the pension funds will receive more interest payments, but over a longer period of time, according to Thomas Esso, executive secretary of the Chamber of Corporate Trustees. The local-currency securities that the funds currently hold mature earlier than the ones that they’ll receive in the swap.
The government asked the pension trustees to exchange their existing securities — which carry an average coupon of 18.5% — for two new bonds maturing in 2027 and 2028 with an average interest rate of 8.4%, Esso said.
To make up for the shortfall, the government will compensate the holders with more securities — which were issued in February — and an additional cash-payment instrument that offers interest of 10%. That will result in a stream of coupon payments totaling 21%, he said.
“The overarching concern for our members is not to lose any value of our pension funds,” Esso said in an interview. “Our technical team met on the proposal and we realized that the proposal yields the goal. It captures that.”
The country’s labor unions are holding separate talks with the government on the proposal, after which a memorandum on debt exchange may be issued, he said. Ghana excluded pension funds, which hold 29 billion cedis ($2.6 billion) of government bonds, from the first part of a domestic debt exchange after the labor unions threatened to strike over the prospect of losing their savings.
Debt Restructuring
Ghana embarked on a public debt restructuring in December to qualify for a $3 billion International Monetary Fund program. The nation’s assets rallied after the IMF approved the package in mid-May, with an immediate disbursement of $600 million.
The government concluded the first part of the domestic debt swap in February. In that exchange, investors other than pension funds exchanged 87.8 billion cedis, or 67% of existing bonds for new ones, against a government target of 80%. The new securities paid as little as 8.35% coupon, compared with an average of 19% on the old notes.
Further drawdowns from the IMF will depend on Ghana meeting fiscal targets under the program. As a result, the government is racing to reorganize its eurobonds, agree on specific terms of the restructuring with bilateral creditors, and conclude the rest of the domestic debt exchange.
“Domestic debt restructuring is the first major step that paves the way for a restructuring of Eurobonds,” Simon Quijano-Evans, chief economist at Gemcorp Capital Management Ltd. in London, said in emailed response to questions. “Borrowers and lenders want to move on. The IMF program targets are tight, so everything needs to go according to plan to make this work.”
The risk premium on the West African nation’s dollar debt has narrowed by about 640 basis points from a record high reached in March to 2,838 over US Treasuries on Wednesday, according to a JPMorgan Chase & Co. index. The Ghanaian currency, the cedi, was one of the world’s best performers in May.
The finance ministry communicated its proposal to the pension funds last month, Esso said. While it entails an offer to pay a 5% coupon in 2023 and 2024, instead of the 8.4% the bonds carry, the government’s latest proposal will compensate for such a loss, he said.
The nation is seeking to comply with the fiscal framework under the IMF program. Ghana is seeking to reduce its debt to 55% of gross domestic product by 2028, from 71% at the end of December.
Secretary-General of Trades Union Congress Yaw Baah said he will comment after a meeting between the finance ministry and union leaders on Thursday. A spokeswoman for the finance ministry didn’t respond to telephone calls or emails seeking comment.
The pensions regulator will come up with forbearance measures to ease prudential requirements on the companies after signing on to the debt exchange, Esso said. The ministry has also said that the Financial Stability Fund will be available to provide capital and liquidity support, he said.
Without these measures, 21 out of the 28 pension trustees will fall into capital problems and face operational challenges due to the debt reorganization, he said.
(Updates with analyst comment in 10th paragraph.)
