Fitch Ratings, the credit rating agency, has downgraded Ghana’s Long-Term (LT) Local Currency (LC) Issuer Default Rating (IDR) [cedi-denominated bonds] to Restricted Default (RD) from ‘C’. The issue ratings on local-currency bonds issued domestically have also been downgraded to Default (D) from ‘C’.
The downgrade of Ghana’s local-currency denominated debt follows the completion of a domestic debt exchange offer by the Republic of Ghana. The exchange was offered to all holders, except pension funds, of 67 eligible bonds governed by Ghanaian law and denominated in Ghanaian Cedis (GHS). The exchange is an element of the recovery programme for which the government is seeking the support of the IMF. On Dec. 12, 2022, Ghana and the IMF reached a Staff-Level Agreement on a three-year arrangement under the Extended Credit Facility (ECF) of about USD3 billion.
All participating holders will receive a set of bonds with maturity dates ranging from 2027 to 2033 in exchange of bonds maturing in 2023, and a set of bonds with maturity dates ranging from 2027 to 2038 in exchange of bonds maturing after 2023. Collectively, these bonds will pay a 5% cash coupon and a paid-in-kind coupon of 3.35% to 5.00% until Feb. 13, 2025, and cash coupons ranging from 8.35% to 10.00%, depending on the specific series, from Feb. 14, 2025.
Distressed LC Debt Exchange
Fitch considers this debt exchange a distressed debt exchange under the agency’s criteria, given the material reduction in terms compared to the original contractual terms and the exchange being necessary to avoid a traditional payment default. As a result, Fitch has assigned a ‘RD’ rating to the Long-Term Local Currency Issuer Default Rating. Among the 67 eligible bonds that could be tendered, six are rated by Fitch. A ‘D’ rating has been assigned to these six bonds.
A GHS4.2 trillion principal payment was due on Feb. 6, 2023. However, eligible holders holding this bond did not receive a final interest payment and a final principal payment, regardless of whether they had tendered or not. Although authorities have announced that coupon payments and maturing principals will be honoured in line with the Government fiscal commitments, it is not yet clear when the payment will be made to holders who opted out of the domestic debt exchange. This security is one of the six issues that have been downgraded to ‘D’.
Interest Payments to Be Significantly Reduced in 2023
Outstanding principal of eligible bonds amounts to GHS132.4 billion (22% of 2022 estimated GDP). Assuming an 80% participation rate equally distributed among eligible bonds and eligible bondholders, the domestic debt exchange would allow Ghana to reduce its interest payments by 1.5 to 2.0 percentage points of GDP in 2023, not considering the cost, in 2023, of rolling over bonds that would have matured in 2023.
In conclusion, the recent downgrade of Ghana’s Long-Term Local Currency Issuer Default Rating by Fitch Ratings indicates the ongoing challenges the country is facing in the economic sphere. The completed domestic debt exchange is part of the government’s efforts to address the country’s economic woes, and the reduced interest payments