Mark Weidemaier, Ugo Panizza and Mitu Gulati teach international finance and law respectively at the University of North Carolina, the Geneva Institute and the University of Virginia. Mark and Mitu co-host the podcast”Clauses and controversies” where Ugo is a frequent guest.
An investor friend taught us a new acronym a few days ago: FUD. He used the term – short for fear, uncertainty and doubt – to describe his feelings about a genius Ghana bond maturing in 2030.
Ghana is on the brink of default after a wave of borrowing over the past decade, including a string of recent kick-the-can issues. He owes about $50 billion in total. Of this amount, approximately $14 billion is denominated in foreign currencies, including a $1 billion bond maturing in 2030.
FUD is usually used around deliberate misinformation (or actual information that someone is trying to discredit) and anyway we initially didn’t understand why anyone would have FUDDY feelings about Ghana 2030? Unlike other Ghanaian Eurobonds, it is backed by a World Bank guarantee of 40% of face value.
But on closer reading, multiple sources of legitimate FUD come to light.
Issued in 2015, the Ghana 2030 Bond features the latest next-generation aggregate “collective action clause”, which has been phased in since 2014 to ensure orderly debt restructuring. What distinguished these new provisions was an “aggregation” mechanism that was absent from previous generations of government bonds. Simplifying a bit, aggregate CACs allow countries to restructure multiple series of bonds with a single vote on all series as long as 75% of creditors vote yes and everyone is offered the same deal (“uniformly applicable treatment”). “).
Now for the FUD. The new sophisticated CAC of the Ghana 2030 bond allows for aggregation with other series of bonds that constitute “aggregable debt securities”. This term is defined as meaning:
. . . debt securities which incorporate or incorporate by reference this Condition 13 and Condition 14 (Aggregation Agent; Aggregation Procedures) or provisions substantially contained in these terms which provide that debt securities which include such provisions may be aggregated for voting purposes with other series of debt securities.
In short, the Ghana 2030 can be aggregated for voting purposes with other foreign currency bonds that have the same aggregate CAC, or “provisions substantially in such terms”. Then, if 75% of the voters are in favor of a restructuring, the 2030 holders will be forced to accept the same agreement. And because all bondholders to have to are offered the same deal, any restructuring proposal will almost certainly not be backed by a guarantee. Farewell to the World Bank guarantee!
(Adding local currency bonds into the aggregation adds even more FUD, but we’ve left that out.)
In principle, surety documents do not have to be interpreted to allow this result. Other Ghanaian foreign law bonds with aggregated CACs – those without guarantees – do not have exactly the same aggregated CAC as the 2030 bond. The reason for this is that the CACs list a dozen key issues (such as conditions of payment) which can only be modified by a qualified majority vote. These are called “Reserved Questions”. Ghana 2030 has one matter reserved more than the others: the guarantee. But remember that the 2030 bond can be aggregated with any other bond whose aggregate CAC is “substantially in these terms” (i.e. the terms found in Ghana 2030). And it is hardly obvious that this difference means that the other obligations are not “substantially” the same as those of 2030.
It may seem unfair to give Ghana 2030 bondholders the same restructuring deal as debentureholders. But the aggregate CAC does not oblige the bond issuer to respect the differences in economic value of different bonds. In fact, the “uniform application” requirement seems to require the opposite. To simplify, it requires the issuer to offer each bondholder the same conditions (or the same new instrument). The logic behind this requirement was that investors holding different securities would find that their interests converged in a crisis. Except they don’t.
Could all this happen? Ukraine recently concluded a “debt reprofiling”, with foreign creditors agreeing to a payment freeze for two years. It has several series of bonds outstanding, some of which had aggregation provisions like those of post-2014 Ghana Eurobonds. Ukraine’s reprofiling included ordinary sovereign bonds and two government-guaranteed corporate bonds. Ukraine did not shy away from bundling these bonds, despite the fact that the secured bonds were arguably senior credits. We’re willing to bet that the argument for aggregating corporate covered bonds with regular sovereign bonds was that all counted as ‘aggregateable debt’.
Perhaps the World Bank will step in to protect the 2030 issue. We imagine it would like to protect the value of its guarantees. If the Bank wants to step in, it might be possible to cash out the 40% guaranteed portion of Ghana 2030, leaving the rest to be restructured as a regular Eurobond. Something like this was done when Ecuador restructured its collateralized Brady bonds in 2000, but it took a lot of fancy lawyers.
But even this path involves FUD. Ghana is broke. If the World Bank pays the guarantee, then Ghana owes the World Bank immediately. And the World Bank, like the IMF, has priority status – it gets paid first and in full.
In theory, this means that any attempt at restructuring stops until the arrears to the Bank are cleared. There may be a way around this roadblock. But that’s another wild card, and hardly the kind of uncertainty the holder of a covered bond wants to contemplate.
So how does the market view all of this?
In May 2022, the market believed that the FUD bond was going to be fully redeemed, while the other bonds were going to be discounted. The FUD was trading at par, with a yield to maturity of 10.8% (the coupon on this bond is 10.75%). In contrast, two Ghanaian Eurobonds maturing in 2029 and 2032 were trading at face value discounts of 40% and 60% respectively (for yields to maturity of around 16.5%).
Today, investors seem, finally, a little more fearful, uncertain and dubious. The FUD bonds trade at a 30% discount (19% yield to maturity), while the other two bonds have yields to maturity well over 30% and trade at 68% and 78%. discount, respectively.
Is the market predicting (praying?) an Equator-like solution?
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