Eurobonds Default: Fitch Affirms Ghana Credit Rating at ‘RD’

Fitch Ratings has affirmed Ghana’s long-term foreign currency (LTFC) issuer default rating (IDR) at ‘RD’ and long-term local-currency (LTLC) issuer default rating (IDR) at ‘CCC’.

RD, indicates Ghana has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. In the rating note, Fitch said it typically does not assign outlooks to sovereigns with a rating of ‘CCC+’ or below.

Explaining its decision, Fitch said the affirmation of the LTFC IDR at ‘RD’ reflects that Ghana is still defaulting on its outstanding Eurobonds following the expiration of the grace period for a missed coupon payment in February 2023.

Ghana has since made progress in its common framework restructuring process. An agreement on the main terms of the official bilateral debt treatment with the official creditor committee was reached in January 2024.

The memorandum of understanding that formalises these terms as well as non-financial terms, was finalised in June 2024, the rating note added.

In June 2024, Ghana and representatives of bondholders who own or control approximately 40% of the outstanding USD13 billion Eurobonds, reached an agreement in principle (AIP) on the terms of the Eurobonds restructuring.

This AIP meets both the IMF’s debt sustainability thresholds and the Common Framework’s comparability of treatment clause, Fitch said.

Analysts explained that an AIP was previously reached in January 2024 but subsequently rejected by the IMF as it did not comply with its debt sustainability thresholds.

“We expect the consent solicitation to be launched imminently, and the Eurobond exchange to be settled by September 2024, although there could still be some delays due to ongoing negotiations on the restructuring terms of the International Development Association (IDA)-partially guaranteed bond”.

The rating note stated that Ghana’s foreign currency non-bond commercial debt would still need to be restructured on comparable terms. We expect completion of the external debt restructuring by end-2024.

In exchange for the 15 outstanding Eurobonds, investors will be offered a set of new bonds, with two options.

Under the ‘disco’ option, a nominal haircut of 37% will be implemented on all claims, including past due interests (PDIs), and the remaining claims restructured into bonds maturing from 2026 to 2035 with coupon rates ranging from 0% to 6%.

Under the ‘par’ option, capped at USD1.6 billion, a nominal haircut of 37% will be implemented only on PDIs and the remaining claims restructured into bonds maturing from 2026 to 2037 with coupon rates ranging from 0% to 1.5%.

Unlike another recent common framework restructuring, the new bonds do not offer value-recovery instruments, Fitch rating said.

If implemented, and assuming the USD1.6 billion cap on the ‘par’ option is reached, Fitch stated that the AIP would entail a reduction in Ghana’s foreign currency debt stock of around 6% of estimated 2024 GDP.

The rating note revealed that interest payments would be reduced by 1.1% of GDP in 2024, 0.8% in 2025 and 0.6% in 2026 compared with initially due interest payments, or 7%, 5% and 4% of 2024, 2025 and 2026 revenue and grants, respectively.

These estimates do not factor in the cost of rolling over bonds that would have matured in 2023-2026, implying larger actual debt relief. Assuming similar treatment of non-bond FC commercial debt, the debt stock reduction would reach 8% of estimated 2024 GDP.

The affirmation of the local currency IDRs reflects that Ghana has remained current on the ‘new’ bond payments issued on the settlement date of the domestic debt exchange programme and on LC securities issued since November 2023.

“We consider an additional restructuring of Ghana’s local currency-denominated debt as unlikely, given the sizeable debt service reduction this programme represented. However, the affirmation also reflects still substantial credit risk partly due to elevated interest payments”.

Fitch analysts estimate that 2024 primary surplus, on a commitment basis, will reach 0.3% of GDP, representing a 4.6pp adjustment compared with 2022, driven by a 0.6pp increase in revenue and a 4.1pp reduction in primary expenditure.

Despite a record of fiscal slippage in election years, the rating agency considered there is a low risk of policy slippage in the lead up to the elections due in December 2024, given the strong commitment of authorities to the IMF programme, but there is currently greater uncertainty over the degree of commitment of a new administration.

“We project Ghana’s primary surplus to reach 0.9% of GDP in 2026 on a commitment basis”.

Fitch noted that suspension of external debt service, and merchandise import reduction that more than offset lower export performance, enabled Ghana to reach a current account surplus of 1.8% of GDP in 2023, from a 2.3% deficit in 2022.

“We anticipate the current account balance to return to a deficit of 0.7% of GDP in 2024, on difficulties in the cacao sector and external debt service resumption, followed by 1.5% and 1.7% in 2025 and 2026, respectively”.

These moderate current account deficits (CAD), compounded with large disbursements from international financing institutions, would enable gross international reserves to gradually increase to 2.8 months of current external payments in 2026, from 1.6 months in 2023.

Fitch has affirmed the issue rating on Ghana’s US dollar-denominated notes due October 2030 at ‘CC’. The notes benefit from a partial credit guarantee backed by the IDA for scheduled debt service payments up to 40% of the outstanding principal amount, supporting higher recoveries.

The affirmation of Ghana’s bond partially guaranteed by IDA reflects analysts’ estimation of a nominal recovery rate in the range 51% to 70%, although the modalities of the treatment of this bond are still being discussed. IDA has already made three coupon payments in 2023 and 2024. #Eurobonds Default: Fitch Affirms Ghana Credit Rating at ‘RD’

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